India’s renewed embrace of free trade agreements

Author: Dr Biswajit Dhar, Jawaharlal Nehru University

From early 2022, India’s exports have looked distinctly different. India seemed to have turned towards economic isolationism in 2019 when the government decided to walk away from the Regional Comprehensive Economic Partnership (RCEP) negotiations. The government also announced its intent to review India’s three major Comprehensive Economic Partnership Agreements (CEPAs) with ASEAN, South Korea and Japan.

The rationale for that course was effectively neo-mercantilist, an export heavy capital accumulation strategy, as the government was unhappy with the growing trade deficit with India’s CEPA partners. In the wake of the COVID-induced economic downturn, the government announced the ‘Atma Nirbhar Bharat Abhiyan’, Self Reliant India Campaign, whose cornerstone was the slogan, ‘vocal for local’. The message was clear: domestically produced goods should be preferred over imports.

As the economy began to emerge from the depths of the downturn, the government’s narrative changed dramatically. Scepticism towards bilateral economic partnership agreements became passé as the government committed to negotiations for no less than seven partnership agreements. These included long delayed negotiations with the European Union, Australia, Canada and Israel.

India also initiated negotiations with the United Kingdom and the Eurasian Economic Union and has signed a CEPA with the United Arab Emirates. This is in addition to the revived negotiations for a preferential trade agreement with the Southern African Customs Union.

The India–UAE CEPA was endorsed by the leaders of both countries on 18 February 2022 and will be effective from 1 May 2022. CEPA negotiations with the United Arab Emirates, India’s third largest trade partner, began in late September 2021 and were finalised within three months, a record for India. This agreement is crucial to India for two reasons.

First, India’s exports to the United Arab Emirates have steadily declined from US$38 billion in 2011 to US$25 billion in 2021. This does not bode well for India as the United Arab Emirates is a major gateway to the Gulf and the African continent. Reversing the decline in exports could buoy India’s export prospects. Secondly, an India–UAE CEPA may add momentum to discussions on a possible FTA with the Gulf Cooperation Council, the blueprint for which was agreed almost two decades ago.

In mid-January India and the United Kingdom formally launched negotiations for concluding an Enhanced Trade Partnership (ETP). There have been discussions about including an early harvest deal, which could be the impetus for a fast-tracked conclusion of the ETP. India expects the ETP to help increase a range of exports to the United Kingdom.

For the United Kingdom, a deal with India would not only strengthen bilateral ties with its former colony, but also steal a march over the European Union, which has been negotiating a Broad-Based Trade and Investment Agreement with India since 2005.

India and Australia recently agreed to bring forward the conclusion of an early harvest agreement, which is expected to cover key sectors including textiles, pharmaceuticals, jewellery, education and renewables. This development is seen as the first step towards the early conclusion of an India–Australia Comprehensive Economic Cooperation deal.

The most plausible reason behind India’s newfound enthusiasm for FTAs is the unprecedented lift in exports it has experienced. In 2021, India’s exports reached US$396 billion, nearly 21 per cent above the previous record in 2018. The government is confident that exports during the current financial year, April 2021 to March 2022, will exceed US$400 billion, which has been India’s target for more than a decade.

Imports have also reached a record high of US$573.6 billion. Higher imports indicate that the economy is on course for a sustained recovery in 2022. Given its strong performance so far, it is possible that the current financial year will see trade having played an important role in triggering economic growth.

India’s exports to most of its major destinations reached record levels in 2021. Exports to the United States, India’s biggest export destination, increased by a third over the pre-COVID level. There was also an impressive was the 35 per cent increase in exports to China, which occurred despite high tariffs and frosty political ties. The growth in exports to India’s FTA partners, over 50 per cent to South Korea and 25 per cent to Japan, was notable.

The Indian government should use the positive augury of buoyant exports to provide momentum to its current FTA negotiations.

Biswajit Dhar is Professor at the Centre for Economic Studies and Planning School of Social Sciences, Jawaharlal Nehru University.

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