FTAs and their discontents: Do free trade agreements benefit India?

India's balance of trade has worsened with countries with which it has signed free trade agreements

India’s new-found eagerness to sign a slew of free trade pacts with key trading partners has revived the old question of whether the existing free trade deals have actually benefited the country.
 

Till date, India has signed 13 free trade agreements (FTAs), key among them being Japan, South Korea and the ASEAN (Association of Southeast Asian Nations) grouping.
 

During the first half of the current fiscal (April-September), imports from these Southeast Asian countries grew at a much faster pace compared to exports. For the 10-member ASEAN nations, imports grew 56.33 per cent compared to an 11.61 per cent growth in exports. Outbound shipments from India to Japan witnessed a 5 per cent contraction, while imports saw nearly 11 per cent growth. Similarly, in the case of South Korea, imports jumped 38.78 per cent, compared to a mere 2.69 per cent growth in outbound shipments.
 

A report published earlier this month by Delhi-based think tank Global Trade Research Initiative (GTRI) shows a comparison of the data from pre- and post-FTA periods of 2007-09 and 2019-21 — the first FTA was signed in 2010 — respectively. During this period, India’s merchandise trade deficit with these three key FTA partners — Japan, South Korea and ASEAN — increased at a faster pace than its global trade deficit. The jump was the sharpest in the case of ASEAN (201.5 per cent), followed by South Korea (142.5 per cent), and Japan (120.6 per cent). In comparison, India’s overall trade deficit grew only by 43.1 per cent during this period.
 

“As high import duties in India came down post‐FTA, India’s FTAs have provided immediate and sharp price advantages to partner country firms exporting to India, over their competitors. But Indian firms exporting to partner countries had no such luxury, as MFN duties were zero or low in most partner countries. This led to a high trade deficit. Hence, we say FTAs serve partner countries and not our interests,” Ajay Srivastava, co-founder of GTRI, said. The MFN or the Most Favoured Nation status refers to the protocol that requires countries to offer the same trade terms or customs duties to all World Trading Organization partners.
 

But Sachin Chaturvedi, director general at Research and Information System for Developing Countries (RIS), said though imports from these countries had grown at a faster pace compared to India’s exports, it was important to note that in the case of Japan and ASEAN, imports of parts and components had a higher share than that of finished goods. “This has only added to our export basket,” he pointed out.
 

“However, in the case of trade deals with countries such as South Korea, exports from India faced non-tariff barriers. Therefore, there is a need to review the agreement,” Chaturvedi said.

 

Another challenge that experts pointed out is the poor utilisation of the existing FTAs. The reasons range from the cumbersome process of getting a certificate of origin and the related manual verification process to low awareness about FTAs in the industry. Non-tariff barriers, such as the inability to follow certain standards in the partner country, also hinder India’s exports efforts.
 

Since the start of the year, India has signed two trade agreements — with the United Arab Emirates (UAE) in a record 88 days and another one with a developed nation, Australia. The agreement with the UAE kicked in from March, while the Australia FTA is scheduled to kick in from December 29.
 

India is also negotiating FTAs with some other key developed nations such as the United Kingdom (UK), Canada and the European Union (EU). These nations are not only India’s key export markets but the economies also have greater complementarities. On the other hand, Southeast Asian countries often compete with India for exports of labour-intensive products and information technology jobs.
 

The shift in focus towards signing trade deals with Western developed countries has been aided by rising anti-China sentiment among these economies following Covid-19-related disruptions and the focus on diversifying supply chains under the China-plus-one strategy.
 

Commerce department officials had earlier said that fast-tracking these bilateral trade deals assume greater significance now since India is not part of any local or regional arrangement. FTAs can also help India achieve an ambitious target of exporting goods and services worth $2 trillion by 2030.
 

Arpita Mukherjee, professor, Indian Council for Research on International Economic Relations, said gains from FTAs India signs with its key export markets will be greater if the trade deals are comprehensive.
 

“However, if India is unable to remove some of the restrictions on foreign direct investment and lower tariffs, partner countries may offer a lower level of liberalisation than what they offered to their other FTA partners. In that case our exporters will be at a disadvantage even after the agreement,” she pointed out.
 

According to Ajay Sahai, director general and chief executive officer of Federation of Indian Exports Organisations (FIEO), FTAs are also of strategic consideration now. “I think partnerships with countries such as UAE and Australia are a win-win on both sides. India will be able to make manufacturing exports competitive by importing duty-free raw materials and intermediate goods from these sources, and get greater market access by exporting value-added products to these countries because they are not producing the same items in sizeable numbers,” he said.
 

In this FTA signing spree, however, the big question remains: whether India will opt back into the Regional Comprehensive Economic Partnership (RCEP), the first FTA between Asia-Pacific nations. Although India had been part of the drafting committee for the agreement, it opted out in November 2019 on the grounds that the country’s concerns were not being addressed. As one of the world’s largest such trade agreements, trade economists consider India’s absence as significant.