WORKING PAPER NO. 87 INDO-FRENCH ECONOMIC RELATIONS A Study of Trade and Investment Potential AJEET NARAIN MATHUR SEPTEMBER, 2002 INDIAN COUNCIL FOR RESEARCH ON INTERNATIONAL ECONOMIC RELATIONS Core-6A, 4th Floor, India Habitat Centre, Lodi Road, New Delhi-110 003 Contents Foreword.............................................................................................................................. i I. Introduction............................................................................................................. 1 II. Mutual Economic Interests of France and India..................................................... 4 III. Analysis of Indo-French Trade in goods .............................................................. 13 IV. India’s Export Potential to France ........................................................................ 16 V. French export potential to India............................................................................ 19 VI Untapped Potential in trade of goods between India and France.......................... 20 VII Potential for trade in services between India and France ..................................... 21 VIII Investment Potential..............................................................................................22 IX Institutional Barriers impeding Indo-French Trade and Investment..................... 24 X Conclusions........................................................................................................... 26 References......................................................................................................................... 29 Appendix A....................................................................................................................... 31 Appendix B ....................................................................................................................... 35 Appendix C ....................................................................................................................... 38 Appendix D....................................................................................................................... 41 Appendix E ....................................................................................................................... 43 Appendix F........................................................................................................................ 46 Appendix G....................................................................................................................... 47 Appendix H....................................................................................................................... 48 Appendix I ........................................................................................................................ 49 Appendix J ........................................................................................................................ 50 Foreword The analysis in this study addresses the question of why India's economic relations with France have not developed to their potential and formulates a methodology which enables identification of several underdeveloped avenues of mutual trade and investment. The paper also notes certain legal and institutional barriers to trade and investment in both countries. The study further points to the need for deepening this research into understanding product-services linkages for mutual investments in selected sectors. This study breaks new ground to show how paired comparisons of any two countries in respect of trade and investment potential may be undertaken. I hope this will encourage more such studies of twinning comparisons of India's economic relations with other countries in the future. The study is a welcome addition to policy research on trade and investment potential in Indo-European economic relations. Earlier versions of the paper were presented at the bilateral seminar "Indo-French Relationship in a Changing World", March 7-8, 2002, organised by Maison des Science de l'Homme, Paris and the Indian Council of Social Science Research, New Delhi, and at a seminar on "Indo-French Economic Relations" at ICRIER on July 5, 2002. Dr Shankar N Acharya Acting Director & Chief Executive ICRIER, New Delhi September 2002 i INDO-FRENCH ECONOMIC RELATIONS1 A Study of Trade and Investment Potential Ajeet Mathur2 I Introduction This paper aims to present an overview of Indo-French Economic Relations with an analysis comparing mutual trade and investment to its potential. The paper identifies the most promising sectors where product-services linkages could be developed together with policy recommendations to mitigate barriers to trade and investment. Studies of bilateral economic relations can be useful alongside multilateral, plurilateral and regional arrangements in any one of the following situations: (a) where trade imbalances persist over time, (b) where trade volumes are low or the trade basket remains undiversified, (c) where mutual stakes in trade and investment stagnate below a critical minimum threshold that could support the intensity of strategic political partnership desired by the two countries. In Indo-French Economic Relations, all three of the above reasons exist and bilateral relations further need to take note of: i) French participation in market and institutional integration within the EU which limits member countries’ capacities to sustain bilateral international 1 Revised version of the paper presented at the seminar on ‘ Indo-French Economic Relations’ on July 5, 2002 organised by the Indian Council for Research on International Economic Relations (ICRIER). 2 The author is Professor, Indian Council for Research on International Economic Relations, East Court, Habitat Centre, New Delhi. Email: [email protected]. I thank Isher Judge Ahluwalia and Rakesh Mohan for useful comments on an earlier draft. I am grateful to Nutan Biswas for providing the Government of India’s perspectives on the 11th Indo-French Joint Committee’s deliberations of December 2001, to Olivier Louis and Bernard Urbany of the French Economic, Trade and Finance Commission in New Delhi for providing the French Government’s perspectives, and to Chaitanya Kaushal of the EC Delegation in New Delhi for his technical support with the Eurostat database. Sonu Jain’s assistance in the compilation of the Indo-French trade data- set for this study is gratefully acknowledged. I remain responsible for the views expressed and for any errors that remain. 1 initiatives independently, and French commitments on economic assistance to its former colonies, ii) the need for both countries to adhere to multilateral regimes of the WTO, and, iii) the ongoing strategic dialogue at the political level for potential partnerships in international understanding over world-views. France and India stand to gain from strengthening mutual economic relations for a number of reasons. India aims to complete its economic reform process, diversify its trade basket, broaden the direction of its foreign trade and leverage for a place in the UN Security Council. EU’s share of world trade and in worldwide investment have reduced in the past two decades and continue to decline. The shrinking EU share in Indian trade is consistent with EU’s losses in trade shares to the rest of the world as a feature of the long term trend. During the period 1990-2000, the EU-15 countries lost, on average, about 1 % share in world merchandise trade every year according to WTO’s World Trade Statistics 2001. The loss would be greater with the inclusion of services trade. This situation is fraught with political consequences for EU member countries, particularly the two P-5 EU countries, France and the United Kingdom, although the loss of French share in world trade was less than EU’s loss percentages during the 1990s. These developments point to the need to view Indo-French relations in a way which Pierre Turquet termed “relatedness” rather than relationship. For reasons noted above, it would not be useful to view Indo-French Economic Relations merely from the perspective of France’s problems of adjustment to European integration and internationalisation or from within the limited context of India’s trade and investment liberalisation. Today’s situation is also different from what France faced in determining its external relations with decolonised African, Carribean and Pacific Countries under the Yaounde and Lome Conventions when France could focus outside of itself on the reform processes in those countries. Yet, gradual incrementalism pervades Indo-French bilateral interfaces and joint commission interactions (Huwart, 2001). When 2 there is no incentive to examine potential synergies because of low trade volumes and size of investment, systematic research is also inhibited. Business firms easily spot obvious opportunities as in sub-contracting and procurement or in marketing of a narrow range of capital goods from France to India and India’s traditional undiversified export basket of consumer goods to France but that is all. There has never been any systematic study to formulate a methodology and analyse Indo-French trade and investment potential and compare this potential with what has been achieved in actual ground realities with a view to close the gap. The residues of today’s Indo-French economic relations can be traced to the Anglo-French rivalry in pre-independent India during the 18th and 19th Centuries which resulted in a French withdrawal from India