UPSC Mains
GS Paper III
Economy & Trade
India’s Free Trade Agreement Strategy
Despite a shift toward bilateralism, FTAs have widened trade deficits and challenged the assumption that agreements automatically stimulate export growth.
ASEAN Trade Deficit
$51.2B in 2025
FTA Utilisation
Only 20-30%
GVC Integration
Declined to 34.38%
🌍
Context and Background
- India has recently concluded Free Trade Agreements (FTAs) with the UAE, Australia, Oman, UK, EU, and New Zealand.
- Ongoing trade negotiations continue with the US, Gulf countries, and Canada, marking a decisive policy shift toward bilateralism.
- These FTAs are intended to serve as vehicles for market access and Global Value Chain (GVC) integration.
- However, the foundational assumption that FTAs uniformly stimulate export growth warrants a far more nuanced view given recent data.
📉
Key Aspects of India’s FTA Performance
- Widening Trade Deficits: India’s trade deficit with ASEAN increased sharply from $10.4 billion in 2012 to $51.2 billion in 2025. Imports have outpaced exports significantly, particularly with Japan and South Korea.
- Reversed Surpluses: India’s trade surplus with Singapore entirely turned into a trade deficit after signing their agreement.
- Declining Competitiveness: India’s share of ASEAN’s import basket dropped from 3.42% to 1.71% (2012-2025). Similar declines were seen in Singapore (2.27% to 1.71%) and South Korea (1.33% to 1.02%).
- Weakening GVC Integration: India’s Global Value Chain (GVC) integration as a percentage of gross trade declined from 37.13% to 34.38%, dropping with key partners like South Korea, Japan, and Vietnam.
- South Asian Exception: The South Asian region is the major exception, where India’s trade surplus actually expanded from $6.7 billion to $20 billion.
India’s average annual trade deficit with ASEAN, Japan and South Korea reached nearly $62 billion in the last three years. In FY2025 alone, India recorded a trade deficit of over $50 billion with UAE, Australia, Mauritius and EFTA.
Despite multiple FTAs, India remains stuck on the margins of manufacturing-led trade integration. Only 20-30% of eligible Indian exports actually use FTA preferences due to high compliance costs.
⚠️
Challenges with India’s FTAs
Tariff Asymmetry
FTAs reduce India’s traditionally high import duties, while Indian exports gain little margin where foreign tariffs are already low.
Inverted Duty Structure
Higher duties on imported raw materials compared to lower duties on finished goods severely increase costs for domestic manufacturers.
Low FTA Utilisation
Compliance costs and complex rules often outweigh tariff benefits, leaving 70-80% of eligible exports unused by Indian firms.
Manufacturing Shift
Firms increasingly prefer a “Make in ASEAN, Sell in India” model due to cheaper foreign production combined with duty-free access.
Industrial Capability Gap
Weak domestic industrial capabilities, logistical inefficiencies, and infrastructure constraints fundamentally undermine FTA benefits.
Policy Flexibility Loss
FTAs risk becoming rigid instruments of trade liberalisation that constrain future policy flexibilities rather than driving industrial transformation.
🧭
Way Forward for India’s FTA Strategy
Tariff Rationalisation
Align tariffs on industrial inputs with FTA commitments to fix inverted duty structures and strengthen domestic supply chains.
Compliance Simplification
Simplify Rules of Origin (ROO) and broader FTA compliance procedures to drastically increase utilisation by Indian exporters.
Industrial Policy Integration
FTA strategy must be tightly integrated with technological upgrading, strategic investment, and domestic value addition frameworks.
Domestic Manufacturing Boost
Strengthen industrial competitiveness through “Make in India” initiatives and structural reforms before negotiating further broad FTAs.
GVC Participation Strategy
Focus explicitly on supply chain realignment and targeted domestic reforms needed for genuine, high-value GVC integration.
Beyond Market Access
Future FTA strategy must move beyond simple tariff elimination toward strengthening fundamental productive domestic capabilities.
