Reevaluating India's Free Trade Agreements: A Strategic Imperative

India's Department of Commerce has paused FTA negotiations to review its stance on government procurement policies. These policies have successfully bolstered domestic manufacturing and supported micro and small enterprises (MSEs), contributing ₹82,630.38 crore in 2023-24. While developed nations, including the EU and UK, advocate for open procurement access in FTAs, historical data reveals limited opportunities for Indian exporters in these markets. This strategic pause enables India to reassess its approach, ensuring domestic policies continue to promote self-reliance and economic resilience.

Benefits of Free Trade Agreements (FTAs) for India
Free Trade Agreements (FTAs) play a pivotal role in strengthening India’s global trade position by driving export growth, attracting investments, and fostering industrial competitiveness. Here are some key benefits:

_{1. Enhanced Market Access and Export Growth}

• FTAs open new markets for Indian goods and services, exemplified by the India-UAE Comprehensive Economic Partnership Agreement (CEPA), which boosted exports to the UAE by 11.8% to $31.3 billion in FY23.
• Over 97% of UAE tariff lines now offer preferential access to Indian goods, significantly benefiting textiles, gems and jewelry, and engineering sectors.
• These successes set a precedent for ongoing negotiations with larger markets like the EU and UK, where similar preferential access could greatly enhance India’s export potential.

• FTAs now incorporate investment chapters to link trade access with concrete commitments. For instance, the India-EFTA Agreement includes a $100 billion investment pledge over 15 years.
• The UAE-India CEPA has already attracted substantial manufacturing investments, such as a $2 billion food processing facility, boosting India's Make in India initiative and creating jobs.
• These investments not only support manufacturing growth but also drive technology transfer and industrial modernization.

• Post-pandemic, FTAs are crucial for reducing dependency on single-source suppliers and building resilient supply chains.
• The Australia-India Economic Cooperation and Trade Agreement (ECTA) secures access to critical minerals essential for green technology and EV manufacturing.
• Expanding FTAs with the EU and UK could further integrate India into global supply chains, particularly in pharmaceuticals and automotive components.

• FTAs foster technology transfer and innovation partnerships, strengthening India's global value chain participation.
• The India-Japan CEPA has brought advanced manufacturing technologies to the electronics and automotive sectors.
• The recent EFTA Agreement avoids restrictions on India’s generic pharmaceutical exports while promoting cooperation in emerging fields like green technology and digital innovation.

• Services sector benefits include easier professional mobility and skill recognition.
• The UAE CEPA enables mutual recognition of professional qualifications and streamlined visa access for skilled workers.
• The Australia ECTA offers quotas for Indian chefs and yoga instructors, while ongoing EU FTA negotiations prioritize access for India’s IT/ITeS professionals.

• FTAs drive Indian industries to upgrade quality and meet global benchmarks, enhancing competitiveness.
• For instance, Indian textile exports to Australia grew by an average of 11.84% over five years, driven by quality improvements.
• The pharmaceutical sector is similarly thriving under various FTAs, with Indian manufacturers aligning with international quality standards to expand their global footprint.
  
  Key Challenges Associated with India’s Free Trade Agreements (FTAs)
  While Free Trade Agreements (FTAs) have been vital to India’s global trade strategy, several issues have emerged, limiting their effectiveness. Here are the key challenges:
  _{1. Trade Deficit Concerns}
  • India's trade deficits with FTA partners have consistently grown post-implementation.
  • For example, the trade deficit with ASEAN surged from USD 5 billion in 2010 (when the FTA was signed) to USD 43.57 billion in FY23.
  • Similarly, the India-Korea CEPA led to a deficit of USD 9.5 billion in 2021-22.
  • A key factor is low FTA utilization by India, averaging around 25%, compared to 70-80% for developed nations.
  _{2. Rules of Origin Violations}
  • The misuse of Rules of Origin provisions is a persistent issue, with goods, particularly from China, being rerouted through FTA partners.
  • A 2020 report revealed fraudulent FTA claims worth ₹1,200 crore, impacting domestic industries.
  • Sectors like electronics and textiles are particularly vulnerable, with Chinese firms allegedly dumping products via FTA routes, undercutting Indian manufacturers.
  _{3. Non-Tariff Barriers (NTBs)}
  • FTAs often fail to address non-tariff barriers, which restrict market access despite reduced tariffs.
  • Indian pharmaceutical exports face high compliance costs in the EU, spending 15-20% more than other destinations.
  • Similarly, Indian food exports encounter strict sanitary and phytosanitary (SPS) measures. For instance, 3,925 shipments of human food were refused entry into the US in four years.
  • Indian spice brand MDH faced significant scrutiny in the US, leading to a rejection of 14.5% of its shipments since 2021.
  _{4. Adverse Impact on Domestic Industries}
  • FTAs have pressured sectors like agriculture, dairy, and textiles, affecting small-scale farmers and producers.
  • Cheap agricultural imports from partner nations have disadvantaged local farmers. For example, dairy farmers raised concerns during India-Australia FTA talks, leading to a delay in negotiations.
  • Duty-free imports of garments from Bangladesh under SAFTA have hurt India’s textile industry, as Bangladesh uses Chinese fabrics and low-cost labor to produce garments and export them to India without tariffs.
  _{5. Limited Access for Indian Services}
  • India’s FTAs have struggled to ensure equitable access for its competitive services sectors, including IT, finance, and professional services.
  • In the India-ASEAN FTA, goods trade grew, but regulatory restrictions hindered Indian service providers from accessing Southeast Asian markets.
  • Ongoing UK FTA negotiations highlight similar issues, with India pushing for liberalized visa rules and professional mobility to benefit its service sector.
  _{6. Intellectual Property Rights (IPR) Disputes}
  • IPR provisions in FTAs, especially with developed nations, often conflict with India’s domestic policies.
  • The India-EU FTA faces hurdles over pharmaceutical patent demands that could increase medicine costs.
  • Similarly, UK negotiations involve data exclusivity issues that could impact India’s generic drug industry.
  _{7. Environmental and Labor Standards Compliance}
  • New-age FTAs increasingly include stringent environmental and labor conditions that may reduce competitiveness.
  • The EU's Carbon Border Adjustment Mechanism could affect USD 8 billion worth of Indian exports, despite tariff preferences.
  • Labor standards in FTAs with developed nations may raise compliance costs for labor-intensive sectors like textiles and leather.
  _{8. Geopolitical Considerations}
  • India’s geopolitical concerns play a significant role in its FTA strategy, particularly regarding tensions with China.
  • India declined to join the Regional Comprehensive Economic Partnership (RCEP) in 2019, citing concerns about unequal market access and threats to agriculture, dairy, and small-scale industries.
  • Fears of increased dependency on China’s economy and trade imbalances further influenced this decision.
  Strategies for India to Negotiate FTAs That Safeguard National Interests
  To maximize the benefits of Free Trade Agreements (FTAs) while protecting national priorities, India can adopt the following strategies:
  _{1. Adopt a Strategic Negotiation Framework}
  • Use data-driven models to assess the sector-specific impact of FTAs and set thresholds for market access commitments based on domestic industry readiness, evaluated through metrics like productivity, quality standards, and competitiveness.
  • Develop an advanced AI-powered trade analytics platform to monitor real-time trade flows, predict impact scenarios, and guide negotiations. A system akin to South Korea's KOSIS (Korean Statistical Information Service) could serve as a blueprint.
  • Establish a permanent, multi-stakeholder negotiation team comprising technical experts, industry leaders, and policymakers for informed and holistic decision-making.
  _{2. Strengthen Rules of Origin (RoO) Enforcement}
  • Upgrade the Certificate of Origin (CoO) system using blockchain technology to ensure real-time verification and transparency.
  • Introduce mandatory geo-tagging and digital tracking for high-risk import categories, alongside AI-based risk assessment tools to detect irregular trade patterns. Singapore’s Networked Trade Platform offers a model for such integration.
  • Create specialized RoO enforcement units at major ports, equipped with advanced testing and auditing systems to verify value addition claims.
  _{3. Enhance Domestic Industry Competitiveness}
  • Launch industry-specific initiatives to improve competitiveness before FTAs come into effect.
  • Establish a dedicated fund to support technology upgrades, quality certifications, and capacity-building for exporters.
  • Collaborate with FTA partners to create sector-specific training centers, such as expanding the network of Japan-India Manufacturing Institutes in key industrial zones.
  • Develop a rating framework for export-ready firms and offer targeted support based on performance.
  _{4. Boost Services Trade}
  • Compile a comprehensive database of non-tariff barriers (NTBs) in services for each FTA partner to address market entry challenges.
  • Prioritize Mutual Recognition Agreements (MRAs) for professional qualifications to facilitate the movement of skilled workers.
  • Introduce a digital platform enabling service providers to report and resolve access barriers, modeled after the EU’s Trade Barriers Reporting system.
  • Establish specialized service export promotion councils with market-specific strategies for key regions.
  _{5. Integrate MSMEs into Global Trade}
  • Set up MSME export facilitation centers in key industrial clusters to provide FTA-specific advisory and support services.
  • Develop a digital platform to connect MSMEs with international buyers in FTA partner nations.
  • Offer financial assistance for international certifications and compliance, enabling MSMEs to meet global standards.
  • Launch an “MSME Global Connect” initiative with targeted strategies for each FTA market and introduce performance-linked credit schemes for exporters.
  _{6. Build Robust Digital Trade Infrastructure}
  • Create secure, standardized digital documentation systems compatible across FTA networks, leveraging frameworks like India Stack.
  • Collaborate with partner countries to enable cross-border digital payments through UPI-based systems for seamless transactions.
  • Develop dedicated cybersecurity frameworks to protect cross-border digital trade infrastructure.
  _{7. Strengthen Value Chain Integration}
  • Identify strategic value chains where India can expand its role and provide targeted support to improve integration.
  • Establish specialized industrial parks for sectors aligned with FTA partner value chains.
  • Launch supplier development programs to enhance partnerships with major companies from FTA partner nations.
  • Implement sector-specific skill development initiatives to meet the demands of global value chains.
  _{8. Institutionalize Review and Renegotiation Mechanisms}
  • Set up periodic review systems with measurable performance indicators for each FTA.
  • Develop safeguards to address import surges, such as automatic triggers for corrective measures.
  • Establish permanent joint working groups with FTA partners to maintain continuous dialogue and address emerging issues proactively.
  • Define clear protocols for renegotiations to adapt to evolving trade dynamics and protect domestic interests.
    
    Key Takeaways
    India's strategic pause in Free Trade Agreement (FTA) negotiations highlights the need to reassess government procurement policies, with a focus on boosting domestic manufacturing and supporting Micro, Small, and Medium Enterprises (MSEs). By addressing existing challenges and conducting thorough evaluations, India can develop FTAs that foster economic growth while protecting vital sectors. A well-balanced approach will ensure India can leverage the benefits of FTAs, enhancing competitiveness and aligning with the nation's long-term economic and strategic goals.
    

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