The Union Cabinet has approved holding negotiations for Trade Agreement with Peru

• The Union Cabinet has approved holding negotiations for Trade Agreement with Peru on trade in goods, services and investment.
• The trade agreement will be an important landmark in India-Peru relations and consolidate the traditional fraternal relations that have existed between India and LAC countries.

Analysis:

• India established diplomatic relations with Peru way back in March 1963. Starting in the early 1990s, there have been increasing economic and business interests between both nations.
• The enhanced interest in increasing bilateral trade ties between India and Peru is primarily because of India’s rise as a technological and economic power along with the strong growth of Peru’s economy in the past decade.
• Peru’s interest in enhancing bilateral ties with India is driven by a desire to maintain its presence in the Asian region, bolstered by Peru’s Asia-Pacific Economic Cooperation (APEC) membership.
• India’s interest in the South American nation is mainly due to the fact that Peru, the seventh largest in Latin America in terms of nominal GDP and sixth in terms of GDP (PPP), is now classified as one of the fastest growing economies in Latin America, thanks to its aggressive free trade strategies.
• With an increasing GDP growth rate over the years, along with stable currency exchange rates and low inflation rates in recent years, this has led to extensive economic growth and rapid industrial expansion in Peru.
• On top of this, both the nations are members of the Non-Aligned Movement (NAM) and the Group of 77 (G-77). Good diplomatic relations thus make it easier for both countries to cooperate and work closely on multilateral matters as well.
• Both India and Peru are hoping to increase their bilateral trade ties in the next three to four years by exploring the signing of a Free Trade Agreement (FTA). The FTA will just not be for goods and services, it will be a comprehensive one that will have a holistic impact with even movement of people eased.
• Commercial exchange between India and Peru has almost doubled in the last few years, which has made the possibility of an FTA relevant. Currently, Indian investments have been made in the mining, information technology (IT), and pharmaceutical sectors. The Peruvian government has further invited Indian businessmen to invest in infrastructure construction (roads, highways, ports, and airports), telecommunications, and energy and further to take advantage of Peru’s tourism spots to boost bilateral tourism ties.
• For India, Peru’s natural resources are of particular interest. Peru is the world’s sixth largest producer of gold, second largest producer of sliver, and the third largest producer of copper, tin, zinc, and lead. Peru received permission to sell gold to India in 2011; by 2013, Peru had exported 270 million ounces of gold to India.
• Trade between India and Peru has grown at 25 percent year-on-year without an FTA. With the expected trade agreement, trade growth could soar up to 60-70 percent. Thus, it will be fair to say that an FTA agreement between India and Peru could result in a win-win situation for both the counties.
• Peru is going through a virtuous circle of economic growth. Over the period 2002–12, the size of the Peruvian economy has almost doubled and real GDP grew at an average annual rate of 6.3 percent (the highest 10-year average growth in Peru’s history). With a sustained high growth rate and low inflation, Peru is referred to as the “macroeconomic star of South America” by many experts.
• Foreign direct investment (FDI) is also pouring into mining, hydrocarbons and big infrastructure projects in Peru. FDI in 2012 amounted to $12.2 billion, an increase of 49 percent from 2011. The Peruvian mining sector alone expects to see an investment of $52 billion in the next 10 years. On top of this, the potential for oil and gas is also being explored, and Peru has already started exporting gas to its partner nations.
• India’s exports to Peru should cross its target of $2 billion soon, given the high rate of growth in recent years. However, India’s exports are at a disadvantage vis-a-vis the exports from Peru’s existing FTA partners. It is in India’s interest to initiate negotiations to sign an FTA with Peru to address the disadvantages of Indian exporters to the Peruvian market.

By: Vishal