India’s Free Trade Agreement Strategy

India’s Free Trade Agreement Strategy

Source: Indian Express
GS II: Bilateral, Regional, and Global Groupings and Agreements involving India and/or affecting India’s interests.

Overview

1. News in Brief
2. Key challenges in Free Trade Agreements
3. Way Forward

Why in the News?

A recent opinion article in Indian Express highlighted the challenges India faces in negotiating Free Trade Agreements (FTAs).

News in Brief

• As India expands its network of FTAs, there are challenges that demand attention.
• India has now 15 FTAs covering 27 countries.
• Another 9 agreements with 42 countries are nearing completion, and could account for nearly 75% of the country’s exports, once finalized.

Key challenges in India’s Free Trade Agreements

• Rising trade deficits
  • • • India has witnessed growing trade deficits with several FTA partners, particularly ASEAN countries.

        

      • Imports have grown faster than exports, reducing the expected benefits of trade liberalisation.
        • • • Under MFN commitments, FTAs often give foreign exporters a much bigger advantage in the Indian market than Indian exporters receive abroad.
• Low utilization of tariff benefits
  • • • Indian exporters often make limited use of FTAs because many partner countries already have very low MFN tariffs.
      • The small tariff savings frequently do not justify the costs of complying with Rules of Origin and documentation requirements.
        • • • Only about 20-30%  of India’s eligible reportedly use FTA preferences.
      • India maintains significantly higher MFN tariffs than its FTA partners, creating stronger incentives for foreign exporters to utilise FTAs than for Indian exporters.
• Worsening Inverted duty structure
  • • • An inverted duty structure occurs when import duties on raw materials and industrial inputs are higher than those on finished products.
      • Due to FTAs, many finished goods enter India at low or zero duty, while Indian manufacturers often pay higher duties on imported inputs.
      • This increases production costs for domestic industries, reduces competitiveness, discourages value addition, and can undermine the goals of Make In India.
• “Make in ASEAN, Sell in India”
  • • • Due to FTAs and inverted duty structures, it can become cheaper to manufacture goods in ASEAN countries and export them duty-free to India than to produce them within India.
      • As a result, firms may shift investment and production to countries such as Vietnam, Thailand, and Indonesia, benefitting from lower costs and preferential market access.
      • This can lead to the relocation of jobs and value addition abroad, weakening India’s domestic manufacturing ecosystem and supply chains.
      • And encourage firms to ‘Make in ASEAN, Sell in India’, rather than ‘Make in India’.

Way Forward

• India’s tariffs should better align with FTAs commitment.
• The government and industries must work together.
• Ensure FTAs strengthen India’s manufacturing base instead of encouraging higher imports, overseas production and loss of industrial capacity.

UPSC Prelims Practice Question

Consider the following statements regarding the utilization of Free Trade Agreements(FTA)

1. Indian exporters often make limited use of FTAs when MFN tariffs in partner countries are already very low.
2. Compliance costs related to Rules of Origin and certification requirements can discourage firms from claiming FTA benefits.
3. Low MFN tariffs in partner countries generally increase the utilization of FTAs by exporters.

Which of the statements given above are correct?

a)1 and 2 only

b) 2 and 3 only

c) 1and 3 only

d) 1,2and 3

Answer: a) 1 and 2 only

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