India’s Free Trade Agreements: Boosting Trade or Increasing Deficits?

India’s Free Trade Agreements: Boosting Trade or Increasing Deficits?"

Overview of India's FTA Journey

Free Trade Agreements (FTAs) have become an essential tool to expand international trade, especially for developing nations. Multilateral deals are often seen as favoring wealthy nations, which has led many countries, including India, to sign FTAs as a faster way to open trade channels. India currently has 13 FTAs in place and is negotiating more.

A recent analysis by the Global Trade Research Initiative (GTRI) reviews India’s trade results with three key FTA partners: ASEAN, South Korea, and Japan. The study compares trade data before these FTAs (2007-2009) and after (2019-2021), revealing some significant insights.

India’s Growing Trade Deficit with FTA Partners

The GTRI report highlights two trends:

  1. India’s trade deficit with ASEAN, South Korea, and Japan has grown faster than its global trade deficit. While India’s overall trade deficit grew by 43.1%, its deficit with these three regions surged more: ASEAN at 201.5%, South Korea at 142.5%, and Japan at 120.6%.
  2. Exports to these FTA partners have grown slower than imports. For instance, with ASEAN, exports grew by 104.4%, but imports rose 131.4%. Similarly, exports to Japan and South Korea increased at much lower rates than imports.

Why India’s FTAs Face Challenges

One reason for the deficit growth is the difference in tariffs. India maintains higher tariffs compared to its FTA partners, who often have zero or low tariffs under the Most Favoured Nation (MFN) rules. With low or no tariffs, FTA benefits become less effective since many businesses avoid the extra steps required to claim FTA-related tariff reductions. For example, Singapore applies a zero percent duty for most imports, meaning India’s exporters don't gain much from FTAs in that market.

New FTAs with Western Countries

India’s focus has shifted from Eastern to Western countries for FTAs. However, new FTAs with developed countries may bring challenges beyond tariffs, including stricter regulations on labor, environmental standards, and intellectual property rights, which could act as non-tariff barriers. The report points out that many Western nations already have low MFN tariffs, with a large share of imports at zero duty, making the potential benefits for Indian exports limited.

Careful Negotiations Needed

Ashwani Mahajan, co-convenor of Swadeshi Jagaran Manch, emphasizes a cautious approach to FTAs, particularly to protect sectors that offer large-scale jobs. For example, India’s dairy industry successfully lobbied to exclude dairy from its FTA with Australia, concerned that cheap imports could harm local producers.

India’s government continues to prioritize local industries, especially small and medium-sized businesses, in government contracts. This preference, introduced by the Modi administration, is designed to support Indian businesses but may face pressure in future FTA negotiations to allow foreign competition.

What’s Next for India’s FTA Strategy?

India’s FTA strategy has had mixed results. While FTAs have increased imports and opened doors for exports, the trade balance often tilts unfavorably. The Modi administration has taken a cautious stance, demonstrated by India’s withdrawal from the Regional Comprehensive Economic Partnership (RCEP) in 2019, prioritizing the nation’s interests over rapid liberalization. Going forward, India will need to carefully assess the advantages and challenges of each FTA to ensure a beneficial balance in international trade.


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