Decoding India’s FTA Journey: What does the Future Hold?

International trade forms an important part of an economy’s growth profile, and the recent numbers by the World Bank indicate that trade as a percentage of the gross domestic product stood at 74 per cent in 2022. For India, this figure was about 49 per cent in the year 2022, and while it is lower than the substantive figure of 56 per cent in 2011, it is almost double the figure of 26 per cent in 2001 ( The World Bank, 2023). While India is ramping up its exports, it is yet to emerge as a global export leader. Data shows that 13.6 per cent of world exports is dominated by the United States followed by China (10 per cent), and Germany (5.6 per cent); in contrast, India constitutes just 2 per cent of global exports. As the global trade policy has moved away from World Trade Organisation (WTO) led multilateralism, towards Regional Trade Agreements, this blog tries to understand the evolution of India’s Regional Trade Agreement (RTA) strategy.

13.6 per cent of world exports is dominated by the United States followed by China (10 per cent), and Germany (5.6 per cent); in contrast, India constitutes just 2 per cent of global exports.

Data from the WTO shows that RTAs have demonstrated an unprecedented rise from 5 in 1970 to 361 in 2024, establishing their importance in global trade. India has 19 RTAs in place, till date. An RTA can take various forms. A free trade agreement (FTA)[1] implies elimination of tariffs on substantial trade between the partner countries. Other forms of bilateral agreements include Preferential Trade Agreement (PTA), Comprehensive Economic Partnership Agreement (CEPA) and Comprehensive Economic Cooperation Agreement (CECA). While FTAs ensure substantive trade coverage, PTAs imply elimination of tariffs on non-substantive trade. CEPA and CECA offer more integrated packages of goods, services and investment liberalisation, along with other areas like intellectual property rights.

Before embarking on its FTA journey in 1998, India had signed 3 PTAs. It had signed the Bangkok Agreement, in 1975, with Bangladesh, Sri Lanka, and South Korea. This later developed into the Asia Pacific Trade Agreement (APTA), with the inclusion of China. Further, India signed the Global System of Trade Preferences (GSTP), in 1988, with 43 developing countries. Later, in 1993, India signed the South Asian Preferential Trade Agreement (SAPTA), with South Asian members, viz. Afghanistan, Bangladesh, Bhutan, Maldives, Nepal, Pakistan, and Sri Lanka.

In 1998, India signed its first FTA with Sri Lanka, followed by the South Asia Free Trade Agreement (SAFTA), which was signed in 2004. In 2005, it signed a CECA with Singapore, and later, a wider FTA with the Association of Southeast Asian Nations (ASEAN) in 2010. India also signed CECAs with South Korea (in 2010), Japan (2011), and Malaysia (2011).

India opted out of the Regional Comprehensive Economic Partnership (RCEP), citing concerns for the domestic industry, along with opening its market to cheap imports from China.

After that, there was a lull period from 2012 to 2021. A key development during this period was that India opted out of the Regional Comprehensive Economic Partnership (RCEP), citing concerns for the domestic industry, along with opening its market to cheap imports from China (Ghosh, 2019). This dry spell of FTAs ended in 2021, when India inked trade agreements with Mauritius, Australia, and the United Arab Emirates (UAE). The plan is to continue this momentum and negotiate agreements with important trading partners like the United Kingdom (UK), the European Union (EU), the European Free Trade Association (EFTA), Canada and Israel.

The discussion below focuses on two broad aspects of India’s FTA journey–key changes in India’s FTA approach since 2011 and the impediments that still prevail and need to be addressed for ensuring optimal utilisation of FTAs.

1. Key Changes in India’s FTA Approach

It is important to uncover the elements of India’s FTA strategy over the years and identify the important changes in this regard. This section discusses three such factors – the choice of trade partners, focus on the services sector and non-tariff measures.

1.1 Trading Partners

India is now looking at the western countries for FTAs, as opposed to its “look east” FTA approach earlier. The new FTA partners appear in the top export destinations for India, that presents an opportunity for India to gain more market access for its competitive sectors. For instance, while India had a trade deficit of around USD 5 Billion in 2010, (at the time it signed an FTA with ASEAN), which rose to USD 26 Billion in 2021-22, it has already had a trade surplus with the UK (as of 2022), amounting to USD 1.6 Billion, and is looking forward to gaining greater market access for its competitive sectors like textiles and apparels.

1.2 Services Exports

The new age FTAs focus on services trade. For instance, under the India-Australia Economic Cooperation and Trade Agreement, India has agreed to lock in 49 per cent foreign equity for a range of Australian banking and insurance services, and Australian internet services businesses in India will also have more opportunities to expand their portfolio with a foreign equity limit of 74 per cent for commercial presence (Australian Government, 2022).

2. Resolving Issues of Non-tariff Measures

The India-UAE agreement has been the first of its kind to resolve the issue of mutual recognition as a step to address the problem of non-tariff measures. The agreement entails a commitment to fast-tracking product registrations for exporting Indian pharmaceutical products to the UAE that have received similar approvals from regulatory authorities in Australia, the EU, Japan, the UK, or the US (Ministry of Commerce and Industry, Government of India, 2022).

3. Way Ahead

India accounts for the least share of high technology exports in total manufacturing exports (around 11 per cent) as compared to countries like Vietnam (41.7 per cent) which dominates the electronics and textile and apparel sector in the global export market

To continue the momentum that India has gained through its recent agreements, there are certain important factors that should be considered for reaping the maximum benefits from future FTAs.

 3.1   Focusing on High Value-added Exports

The top items in India’s export basket are low value-added items, for instance, gems and jewellery and petroleum products. If India wants to reap the benefits of its FTAs, it should transition to high value-added goods, and in fact, FTAs can pave the way for this transition by offering the required know-how and technology transfer. Existing statistics suggest that among the key manufacturing countries, India accounts for the least share of high technology exports in total manufacturing exports (around 11 per cent) as compared to countries like Vietnam (41.7 per cent) which dominates the electronics and textile and apparel sector in the global export market (Table 1). A key driving force for this can be liberalising markets for the inputs, that will attract more technology investments in the country, eventually translating into high-tech exports. While India has reduced its input tariffs over the years, they are still high in comparison to some of the major global economies. If we see it in the context of some of India’s proposed FTA partners, the picture gets quite clear. The UK, with which India is currently negotiating, had a tariff of around 2.7 per cent on intermediate goods in 2021, as opposed to India’s 10 per cent tariff on the same category of goods.

Table 1: High-technology Exports (% of manufacturing exports)

Source: Based on World Integrated Trade Solutions (WITS), World Bank

3.2 Addressing Domestic Constraints

While there has been significant improvement in the infrastructure and regulatory environment, India needs to rectify the existing rigidities to attract more investment and manufacturing facilities. According to a leading agro-chemical firm of India, only 9 of their 22 manufacturing facilities are in India. The balance operates in other countries due to a smoother route to establishing a factory. All the formative procedures for setting up a factory, like acquiring land, environment clearances, add to the cost, and act as disadvantages. This is one of the major reasons for Vietnam attracting investment, as it extends benefits like tax holidays and ease of land allotment.

3.3 Industry Consultations

One of the concerns of the Indian industry regarding FTA negotiations is the lack of consultation with the industry on various aspects of FTA negation. As industry is the main impact bearer of the FTAs, it is imperative to formulate guidelines to consult the key industry players during FTA negotiations to achieve the most efficient outcomes. This will help policymakers in making informed decisions based on sectoral weaknesses and strengths.

Bilateral trade agreements are assuming an important place in the global trade policy space and offer immense opportunities to ensure mutual gains to trading partners. In this regard, it is important that India becomes a key player in the FTA game and adopts the correct approach to ensure maximum benefits to its domestic economy, in the form of competitive manufacturing, access to advanced technology and innovation, and better foreign market access to its goods and services exports.

References

Australian Government. (2022). Australia-India economic cooperation and trade agreement.

Ghosh, K. (2019). India opted out of RCEP to protect domestic industry from cheap imports: Piyush Goyal. Moneycontrol. Retrieved from https://www.moneycontrol.com/news/economy/policy/india-opted-out-of-rcep-to-protect-domestic-industry-from-cheap-imports-piyush-goyal-4607151.html

Ministry of Commerce and Industry, Government of India. (2022). Bilateral cooperation on pharmaceutical products. Annex 5A, comprehensive economic partnership agreement (CEPA) between the Government of the Republic of India and the Government of the United Arab Emirates (UAE).

The World Bank. (2023). World Bank open data. Retrieved from: https://data.worldbank.org/indicator/NE.TRD.GNFS.ZS?locations=IN