What went wrong with India’s FTAs?

Author: Rahul Nath Choudhury, EY LLP

India has so far signed 13 free trade agreements (FTAs), all of which differ in their scope and nature. But the majority of these agreements have failed to produce their desired results and have contributed to India’s high trade deficit. India’s imports from its FTA partners have increased more than its exports.

In the period between 2017 and 2022, India’s exports to its FTA partners increased by 31 per cent, while its imports increased by 82 per cent. India’s FTA utilisation remains very low at around 25 per cent, while utilisation for developed countries typically sits between 70–80 per cent. This low utilisation highlights India’s alarming failure to take advantage of the benefits made available through its bilateral and multilateral trade agreements. Recognising the ineffectiveness of these FTAs, the Indian government began reviewing them in 2019.

One of the fundamental reasons for the negligible progress of India’s FTAs is the lack of adequate industry and stakeholder consultation during the negotiation process. Negotiators have failed to involve representatives from relevant industries, businesses and associations, resulting in a narrow understanding of the FTAs’ potential impact on various sectors. This has led to market access being granted to FTA partners without considering critical views and concerns from domestic industries.

While India’s pre-FTA most favoured nation tariff rates were higher than those of its partners, the FTAs led to a reduction in tariff rates, enabling partners to penetrate deeper into the Indian market. But non-tariff barriers such as stringent standards, sanitary and phytosanitary measures and technical barriers to trade persisted, confining Indian exporters’ access to partner markets and limiting export opportunities. For example, despite having an FTA with Japan, Indian exports have remained stagnant due to Japan’s high import standards.

The complexity of certification requirements and rules of origin under the FTAs have hindered India’s ability to streamline processes for exporters. The arduous procedures and paperwork have made it difficult for exporters to meet prescribed standards and the high cost of certificates of origin has also increased compliance costs.

The government’s lack of comprehensive efforts to popularise FTAs among industry stakeholders after their implementation has hindered the FTAs’ effective implementation. After the FTAs came into effect, there were limited outreach activities and inadequate marketing to create awareness about their benefits among exporters. Many exporters do not know about the incentives and potential advantages available to them under the FTAs, resulting in underutilisation of the agreements.

The disparity in the performance of the manufacturing sectors in India and its FTA partner economies such as South Korea, Malaysia, Vietnam and Thailand has been another factor hindering the FTAs’ progress. South Korea and ASEAN’s manufacturing sectors outperformed India’s in critical industries such as electronics, automobiles, leather and textile products, among others.

ASEAN’s focus on research, innovation, government support and upgrading value chains has allowed ASEAN member states to produce goods at a lower cost, enhancing their global competitiveness. But Indian manufacturers face challenges that make importing from ASEAN and South Korea more cost competitive than domestic production.

India has recognised the flaws in its existing FTAs and has initiated their review, with the Indian Minister of Commerce and Industry Piyush Goyal acknowledging that earlier FTAs were poorly conceived. India has now refrained from signing any FTA for about a decade. But India renewed its interest by signing the Comprehensive Economic Partnership Agreement (CEPA) with the United Arab Emirates and the Economic Cooperation and Trade Agreement (ECTA) with Australia.

Surprisingly, India’s exports to both countries have shown a significant increase just a few months after the conclusion of the CEPA and remarkable FTA utilisation statistics have also been reported. Along with trade agreements, other crucial developments include boosting trade infrastructure, setting up a fast track mechanism to dispute settlement and digitising various procedures.

India is now adopting a fresh approach towards FTAs and engaging with partners that have high potential to increase trade and are politically and strategically aligned. India’s new FTA strategy seeks reliable and robust supply chain allies that will provide investment, technology access and sustainable trade. Along with lowering tariffs, priorities include building resilient supply chains, production integration, digital trade and environmental protection.

As India embarks on a new journey with FTAs, it should consider its learnings from earlier agreements, especially with regards to industry consultation. India should strive to reduce non-tariff barriers for exporters and create awareness of the benefits of FTAs to help multiply their utilisation.

As India maintains considerably higher tariffs than many of its potential FTA partners, the expected gains from tariff reduction alone appear limited. But forging FTAs with advanced economies could yield a substantial inflow of foreign direct investment which, when combined with technology diffusion, has the capacity to offset the revenue setback from foregoing tariff collection and may even mitigate a negative trade balance.

In addition to bilateral FTAs, India should also assess the viability of participating in multilateral forums considering its domestic constraints.

Rahul Nath Choudhury is a Trade Economist at the EY LLP in New Delhi. The views expressed in this article are the author’s own.

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