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India has rejected a proposal from Mauritius for a free trade agreement (FTA) due to apprehensions that it could turn into a channel for goods from other countries to evade import duty in the Indian market.

The Indian view is that stipulations related to rules of origin would not be good enough to prevent such trade diversion and unintended benefits to goods from other countries.

The move comes at a time when India is working on trade agreements with the Asean, Thailand, Singapore, Gulf countries, South Africa and Latin American countries. New Delhi's decision has come as a disappointment to Mauritius, which was keen on an FTA with India.

The FTA was supposed to be part of the comprehensive economic co-operation and partnership agreement (CECPA) between India and Mauritius.

According to government sources, the commerce department argued that an FTA with Mauritius would result in trade diversion, with the island nation located on the Indian Ocean becoming a centre for re-export of goods from other countries. This view was highlighted during the last meeting of the India-Mauritius joint study group on the proposed CECPA in Port Louis. Mauritius was informed that the FTA was out of the question.

While the official reaction of Mauritius is awaited, the Indian side is of the view that there is no scope for a rethink on the FTA. "The proposed CECPA is on track and we may offer a preferential trade agreement (PTA) instead of the FTA sought by Mauritius," government sources said.

Mauritius, with a population of just 1.25m, offers a very small market and India feels that there are no major benefits for the Indian industry. On the other hand, the benefits to Mauritius are significant as the huge Indian market is growing rapidly.

The market in Mauritius for imported goods is considered to be around $2bn. Officials feel Indian goods face several non-tariff barriers in Mauritius. India's exports to Mauritius stood at just $200m during FY04 compared to $165m the previous year. On the other hand, exports from Mauritius to India declined to $8m in FY04 compared to $16m the previous year.

Since the level of bilateral trade is low and there is no major scope of boosting India's exports to Mauritius, there is no point in risking trade diversion which can provide other countries with unintended trade benefits, officials said. Moreover, India will also suffer on account of unintended revenue loss.

The FTA will also diminish the investment-orientation of the proposed CECPA with Mauritius. It is understood that the agreement will incorporate features that encourage investment and co-operation in services. To assuage the feelings of the Mauritius government, India has offered an PTA and selective tariff concessions through a framework compatible with World Trade Organisation (WTO) norms.

Business competitiveness of joint ventures, which will focus on exports to third countries, would be enhanced through such duty sops.

Under the PTA which is seen as a substitute for the FTA, cotton and pharmaceuticals from India may get tariff concessions in Mauritius. Similarly, India may provide tariff concessions for specialised garments from Mauritius.

The emphasis of the co-operation with Mauritius should be on facilitation of two-way investment flows and trade creation, India feels. A significant portion of foreign direct investment (FDI) flows into India are routed through Mauritius for tax breaks. Despite the controversy over the tax aspects, India and Mauritius share a strong bonding on the political plane.

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