The Prob­lem With India’s Free Trade Agree­ment Strategy

Syllabus: GS3/Economy

Context

• India is expanding its Free Trade Agreement (FTA) network, but the experience with earlier FTAs has raised concerns over widening trade deficits and limited export competitiveness.

What is a Free Trade Agreement (FTA)?

• FTAs are arrangements between two or more countries or trading blocs that primarily agree to reduce or eliminate customs tariff and non tariff barriers on substantial trade between them.
  • They can cover both goods and services.
• FTAs also address issues such as investment, mobility of professionals, and regulatory cooperation.

India’s Free Trade Agreements (FTAs)

• Existing: India currently has 16 operational FTAs covering 28 countries, including the recently implemented India–UK Comprehensive Economic and Trade Agreement (CETA).
  • Since 2020, India has operationalised FTAs with the UAE, Australia, Mauritius, EFTA (Switzerland, Norway, Iceland and Liechtenstein), Oman, and the United Kingdom.
• FTAs awaiting implementation or under negotiation: India has eight additional FTAs involving 41 countries awaiting implementation or under negotiation.
  • The India–New Zealand FTA has been signed and is awaiting implementation.
  • India is also negotiating FTAs with the United States, Canada, Israel, Peru, the Gulf Cooperation Council (GCC), and the Eurasian Economic Union (EAEU).

Why is India Expanding its FTA Network?

• India’s Export-led Growth: India aims to achieve US$2 trillion in exports by 2030, with FTAs serving as an important instrument for expanding merchandise and services exports.
• Expand Market Access: FTAs provide Indian exporters with preferential access to overseas markets by reducing or eliminating tariffs and non-tariff barriers, thereby improving the competitiveness of Indian goods and services.
• Attract Foreign Investment: Preferential trade agreements improve the investment climate by providing greater market certainty, encouraging foreign direct investment (FDI), technology transfer, and supply chain diversification.
• Economic and Strategic Partnerships: FTAs reinforce India’s trade diplomacy and strategic engagement with key economies, supporting initiatives such as Act East Policy, Neighbourhood First, and India-Middle East-Europe Economic Corridor (IMEC).

Challenges in India’s FTA Strategy

• Rising Trade Deficits: Between 2007–09 and 2023–25, the trade deficit increased by 381% with ASEAN, 318% with Japan, and 268% with South Korea, compared to a 142% increase with the rest of the world.
  • In FY 2025, India recorded a trade deficit of over US$50 billion with the UAE, Australia, Mauritius, and EFTA countries.
• Low Utilisation of FTA Benefits: Only 20–30% of eligible Indian exports use FTA benefits, while import-side utilisation is estimated at 60–70%.
  • Compliance with Rules of Origin (RoO), certification requirements, and documentation increases transaction costs.
• Inverted Duty Structure: Higher import duties on raw materials and intermediate goods than on finished products increase production costs for Indian manufacturers.
  • This weakens domestic manufacturing, reduces value addition, and undermines the objectives of the Make in India initiative.
• Shift of Manufacturing to FTA Partner Countries: The existing tariff structure encourages firms to establish manufacturing units in FTA partner countries such as Vietnam, Thailand, and Indonesia, and export finished goods to India.
  • This can reduce domestic investment, employment, and industrial capacity while weakening India’s manufacturing ecosystem.
• Sustainability Measures: Developed countries are increasingly linking FTAs with labour, environmental, and climate-related standards, including the European Union’s Carbon Border Adjustment Mechanism (CBAM).
  • Indian exporters may face additional compliance requirements related to carbon emissions, sustainability, and due diligence.

Way Ahead

• Correct Inverted Duty Structure: Lower duties on raw materials and intermediate items to enhance the competitiveness of domestic producers.
• Build National Competitiveness: Invest in manufacturing, technology, logistics and resilient supply chains as long-term FTA gains depend on strong productive capacities.
• Creation of an FTA Impact Monitoring Authority: Set up a special organization to periodically monitor the utilisation of FTA, sector-wise outcomes, import surges, trade deficits and impact of regulatory commitments on policy space.
• Tackle Non-Tariff Barriers: Emphasise mutual recognition of standards, testing and conformity assessment to promote market access for Indian exporters.
• Strengthen FTA Negotiation Framework: It is important to introduce performance evaluation and accountability for trade negotiators to guarantee that future FTAs adequately protect India’s economic and strategic interests.

Source: TH