Free Trade Agreements

The India–Oman Comprehensive Economic Partnership Agreement (CEPA) came into force on 1 June 2026, becoming the latest addition to India's expanding network of Free Trade Agreements (FTAs). India now has 15 FTAs covering 27 countries, while nine additional agreements involving 42 countries are under negotiation. Once these negotiations are concluded, nearly 75% of India's exports could be covered under FTAs. Although these agreements significantly enhance India's global economic integration, they have also brought attention to several structural challenges, including rising trade deficits, low utilisation of FTA benefits, inverted duty structures, and relocation of manufacturing to partner countries.

What is a Free Trade Agreement (FTA)?

A Free Trade Agreement (FTA) is an agreement between two or more countries that seeks to reduce or eliminate tariffs, quotas, and other trade barriers to facilitate the free movement of goods and services. Modern FTAs extend far beyond merchandise trade and generally include provisions relating to services, investment, intellectual property rights, digital trade, government procurement, dispute settlement, and customs cooperation. The primary objective of an FTA is to improve market access, promote exports, attract investments, integrate economies into Global Value Chains (GVCs), and enhance overall economic competitiveness.

India's Expanding FTA Network

India has steadily shifted towards a more proactive trade policy over the past few years. Along with agreements already operational with countries such as the UAE, Australia, Mauritius, EFTA nations, and Oman, negotiations are progressing with major partners including the European Union, the United Kingdom, New Zealand, and several others. This expanding trade architecture reflects India's strategy of integrating itself more deeply into global markets while supporting the vision of Viksit Bharat.

Despite this progress, India's experience with FTAs has revealed several concerns that require policy attention.

Rising Trade Deficits with FTA Partners

One of the most significant concerns is the continuous increase in India's trade deficit with many of its major FTA partners. Between 2007–09 and 2024–25, India's trade deficit with ASEAN increased by about 381%, while deficits with Japan and South Korea increased by 318% and 268%, respectively. During the same period, India's trade deficit with the rest of the world rose by only 142%, indicating that the increase has been disproportionately higher with FTA partners.

Similarly, under the newer FTAs involving the UAE, Australia, Mauritius, and EFTA countries, India exported goods worth US$48.6 billion during FY2025–26 but imported nearly US$100 billion, resulting in a trade deficit exceeding US$50 billion.

An important exception, however, is South Asia, where India's trade surplus has expanded substantially from US$6.7 billion to nearly US$20 billion, reflecting stronger export competitiveness within the neighbourhood.

The principal reason behind these widening deficits lies in the asymmetry of tariff structures. While India's trade-weighted Most Favoured Nation (MFN) tariff remains around 12.6%, many developed trading partners already maintained very low tariff levels even before entering into FTAs. Consequently, tariff reductions under FTAs have benefited foreign exporters entering the Indian market much more than Indian exporters accessing overseas markets.

Low Utilisation of FTA Benefits by Indian Exporters

Although India has negotiated preferential market access through multiple FTAs, a surprisingly small proportion of Indian exporters actually utilise these benefits. Studies indicate that only 20–30% of eligible Indian exports make use of FTA preferences, whereas nearly 60–70% of imports into India utilise these preferential tariff concessions.

This low utilisation primarily arises because most partner countries already impose very low MFN tariffs, leaving only marginal tariff savings for Indian exporters. In many cases, these limited benefits do not justify the costs associated with complying with Rules of Origin (RoO), obtaining certificates of origin, completing extensive documentation, and fulfilling other procedural requirements.

Thus, despite having access to preferential trade arrangements, many Indian exporters continue exporting under normal MFN rates rather than availing FTA benefits.

The Problem of Inverted Duty Structure

Another major issue emerging from India's FTAs is the worsening Inverted Duty Structure (IDS). An inverted duty structure exists when import duties on raw materials and intermediate goods are higher than duties on finished products.

This creates a serious disadvantage for domestic manufacturers. Industries within India continue to import essential inputs such as steel, aluminium, chemicals, plastics, caustic soda, soda ash, polypropylene, PVC, and Styrene-Butadiene Rubber (SBR) by paying significant import duties. At the same time, finished products manufactured abroad using these very inputs are imported into India at low or even zero tariffs under FTAs.

As a consequence, Indian manufacturers face higher production costs than foreign competitors. This discourages domestic value addition, weakens industrial competitiveness, and undermines flagship initiatives such as Make in India and Atmanirbhar Bharat.

The Emerging 'Make in ASEAN, Sell in India' Phenomenon

One of the unintended consequences of India's FTAs has been the gradual relocation of manufacturing activities to neighbouring FTA partner countries. Since importing industrial inputs into India often remains expensive due to tariffs, many companies find it economically more viable to establish manufacturing units in countries such as Vietnam, Thailand, and Indonesia. Finished goods produced in these countries can subsequently be exported to India under preferential tariff arrangements.

This trend, popularly described as "Make in ASEAN, Sell in India," has gained momentum with increasing investments by both Chinese companies and Indian firms across Southeast Asia.

Sectors such as electronics, chemicals, engineering goods, consumer products, plastics, and steel have witnessed significant production shifts. Over time, this could result in reduced domestic investment, slower industrial growth, fewer employment opportunities, and weakened supply-chain resilience within India.

Structural Causes Behind These Challenges

The underlying cause behind most of these concerns is the difference in tariff structures between India and its FTA partners. India's comparatively higher MFN tariffs create substantial incentives for foreign producers to access the Indian market through FTAs, whereas Indian exporters receive relatively limited additional market access because partner countries had already liberalised their tariffs.

Consequently, India experiences two simultaneous outcomes. Imports increase rapidly due to preferential tariff access, while exports do not expand proportionately because Indian firms derive only modest additional benefits from existing FTAs.

Government Initiatives to Maximise FTA Benefits

Recognising these challenges, the Government of India has increasingly focused on negotiating high-quality and comprehensive trade agreements. Recent agreements with the United Arab Emirates, Australia, EFTA countries, and Oman include provisions extending beyond tariff reductions to cover investment facilitation, services, customs cooperation, digital trade, and regulatory harmonisation.

Simultaneously, flagship programmes such as Make in India, Production Linked Incentive (PLI) Scheme, Atmanirbhar Bharat, and initiatives promoting Global Value Chain integration seek to strengthen India's domestic manufacturing base and improve export competitiveness.

Way Forward

India's future trade strategy should focus not merely on signing more FTAs but on ensuring that existing agreements genuinely strengthen domestic industry. The first priority should be to rationalise import duties on industrial inputs, thereby eliminating inverted duty structures and improving manufacturing competitiveness.

Equally important is simplifying Rules of Origin, reducing documentation requirements, digitising certification systems, and lowering compliance costs so that a much larger proportion of Indian exporters can utilise FTA preferences.

Regular assessment of FTAs should also become an integral part of trade policy. Their impact on trade balance, employment generation, industrial growth, export competitiveness, and investment flows should be periodically evaluated, allowing corrective policy interventions whenever necessary.

Finally, India's trade policy must remain closely aligned with broader industrial objectives such as Make in India, Atmanirbhar Bharat, National Manufacturing Mission, and deeper participation in Global Value Chains, ensuring that trade liberalisation complements domestic economic development rather than weakening it.

Conclusion

India's expanding network of Free Trade Agreements represents an important milestone in its journey towards greater global economic integration. Agreements such as the India–Oman CEPA create significant opportunities for exports, investment, and international competitiveness. However, the persistence of rising trade deficits, low utilisation of FTA benefits, inverted duty structures, and relocation of manufacturing activities highlights important structural weaknesses that require urgent policy attention. By rationalising tariffs, simplifying compliance procedures, strengthening domestic manufacturing, and integrating trade policy with industrial development, India can ensure that FTAs become instruments of sustainable growth, employment generation, technological advancement, and the realization of Viksit Bharat 2047 rather than merely facilitating increased imports.