India’s Free Trade Agreement (FTA) network has expanded significantly, with 15 agreements covering 27 countries, including the recently operational India–Oman Comprehensive Economic Partnership Agreement (CEPA). Simultaneously, negotiations with major partners such as the European Union (EU), United Kingdom (UK), Gulf Cooperation Council (GCC), Peru, and Israel are approaching completion. These agreements are central to India’s strategy of expanding exports, attracting investments, diversifying supply chains, and strengthening its integration with the global economy.
About Free Trade Agreements (FTAs)
A Free Trade Agreement (FTA) is a treaty between two or more countries that seeks to reduce or eliminate tariffs, quotas, and other trade barriers, thereby facilitating the free movement of goods, services, investments, and technology.
The primary objectives of FTAs are to expand market access for exports, promote economic cooperation, encourage investment flows, improve global competitiveness, and integrate domestic industries into Global Value Chains (GVCs). In recent years, India has increasingly used FTAs as a strategic instrument to boost economic growth and strengthen its international economic partnerships.
Key Dimensions of FTAs
Trade Liberalisation
FTAs primarily focus on reducing or eliminating customs duties on goods and services, making products more competitive in partner markets and encouraging higher trade volumes.
Investment Facilitation
They create a stable and predictable policy environment that encourages cross-border investments and promotes long-term economic cooperation between partner nations.
Services Trade
Modern FTAs extend beyond merchandise trade and provide greater market access for sectors such as information technology, finance, healthcare, education, and professional services, while facilitating the mobility of skilled professionals.
Rules of Origin (RoO)
Rules of Origin determine whether a product qualifies for preferential tariff treatment under an FTA. These rules are essential to prevent third-country goods from exploiting trade concessions without adequate value addition.
Supply Chain Integration
FTAs help countries integrate into regional and global value chains by reducing trade costs, improving logistics, and encouraging multinational production networks.
Strategic and Geopolitical Cooperation
Beyond economics, FTAs strengthen diplomatic relations, enhance strategic partnerships, and contribute to broader geopolitical objectives.
India’s Major Free Trade Agreements
India has entered into several significant FTAs and Comprehensive Economic Partnership Agreements (CEPAs), including:
ASEAN–India FTA, covering trade in goods, services, and investments with Southeast Asian nations.
India–Japan CEPA, which promotes tariff reduction, services access, and investment cooperation.
India–South Korea CEPA, focusing on manufacturing and technology sectors.
India–Singapore CECA, emphasizing trade, financial services, and investment.
India–UAE CEPA, which has strengthened logistics connectivity and bilateral trade.
India–Australia ECTA, providing greater opportunities for Indian goods, students, and professionals.
India–Mauritius CECPA, facilitating trade and investment.
India–EFTA TEPA, involving Switzerland, Norway, Iceland, and Liechtenstein, with strong investment commitments.
India–Oman CEPA, aimed at expanding market access and deepening economic cooperation.
Once ongoing negotiations are completed, India’s FTA partners could account for nearly 75% of the country’s exports, significantly expanding its global economic footprint.
Core Issues and Concerns in India’s FTAs
Rising Trade Deficits
One of the most significant concerns is the rapid growth in India's trade deficits with several FTA partners. The trade deficit with ASEAN has increased by 381%, with Japan by 318%, and with South Korea by 268%, compared to a 142% increase with the rest of the world.
Over the last three years, India's annual trade deficit with these three partners alone has averaged approximately $62 billion. Similar trends have emerged under newer agreements with the UAE, Australia, Mauritius, and EFTA countries, where imports have grown faster than exports.
Structural Reasons Behind Rising Deficits
A major reason for these imbalances lies in the difference in Most Favoured Nation (MFN) tariffs. Many of India's FTA partners already maintain very low MFN tariffs, while India's trade-weighted MFN tariff remains around 12.6%.
As a result, tariff reductions often provide greater benefits to foreign exporters entering the Indian market than to Indian exporters accessing overseas markets.
Low Utilisation of FTAs by Indian Exporters
Despite having preferential access to many markets, Indian exporters frequently fail to fully utilize FTA benefits. Export-side utilization rates are estimated at only 20–30%, whereas import-side utilization ranges between 60–70%.
Several factors contribute to this problem. Many partner countries already impose minimal tariffs even outside FTAs, reducing the incentive to seek preferential treatment. Additionally, compliance with Rules of Origin (RoO) requirements, extensive documentation, and certification procedures create significant burdens, particularly for Micro, Small, and Medium Enterprises (MSMEs).
The Problem of Inverted Duty Structure
An inverted duty structure arises when import duties on raw materials and intermediate inputs are higher than those on finished products.
For example, steel and aluminium attract MFN duties of 7.5–10%, whereas machinery and engineering goods manufactured using these materials can enter India duty-free under several FTAs.
This creates multiple challenges, including:
Higher production costs for Indian manufacturers.
Reduced domestic value addition.
Weakening of the Make in India initiative.
Declining global competitiveness of Indian industries.
The 'Make in ASEAN, Sell in India' Phenomenon
Another emerging challenge is the relocation of manufacturing activities to ASEAN countries.
Chinese companies have expanded production facilities in countries such as Vietnam, Thailand, and Indonesia, while some Indian firms have also established manufacturing units in these regions. Goods produced there can subsequently enter India duty-free under existing FTAs.
This trend has several implications:
Diversion of investment away from India.
Loss of domestic employment opportunities.
Weakening of India's manufacturing ecosystem.
Reduced supply-chain resilience.
Way Forward: Strengthening India's FTA Strategy
Rationalising the Tariff Structure
India must reduce duties on critical industrial inputs and align domestic tariff policies with FTA commitments to eliminate inverted duty structures and improve manufacturing competitiveness.
Strengthening Rules of Origin
More robust Rules of Origin are needed to prevent tariff circumvention and ensure that preferential benefits accrue only to products with genuine value addition in partner countries.
Improving FTA Utilisation
Simplifying certification procedures, expanding digital trade facilitation mechanisms, and increasing awareness among MSMEs can significantly enhance the utilisation of FTA benefits by Indian exporters.
Enhancing Export Competitiveness
India must improve logistics efficiency, reduce transaction costs, strengthen quality standards, and build compliance infrastructure to make its exports more competitive in global markets.
Institutionalising Periodic FTA Reviews
Sector-specific impact assessments and safeguard mechanisms should be introduced to address adverse effects on vulnerable industries and ensure that trade agreements remain balanced and mutually beneficial.
Integrating with Global Value Chains
Developing manufacturing clusters, encouraging technology transfer, and promoting innovation-driven production can help India become a key participant in regional and global value chains.
Leveraging India's Strength in Services
India should increasingly focus on expanding exports in sectors where it enjoys a comparative advantage, particularly information technology, healthcare, education, financial services, and professional services.
Conclusion
Free Trade Agreements have become a vital pillar of India's economic and trade strategy, supporting export growth, investment inflows, and global economic integration. However, challenges such as rising trade deficits, low utilisation rates, inverted duty structures, and manufacturing relocation necessitate careful policy calibration.
A balanced approach that combines greater market access with stronger domestic industrial competitiveness, improved Rules of Origin, and enhanced export capabilities will ensure that FTAs effectively support the objectives of Atmanirbhar Bharat, Make in India, and India's ambition to emerge as a global manufacturing and export powerhouse
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In every Lecture. Director Sir will provide conceptual understanding with around 800 Mindmaps.
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