India's ambitious trade strategy, involving numerous free trade agreements (FTAs) across Europe, the Gulf, and North America, is encountering significant challenges. According to the Global Trade Research Initiative (GTRI), these challenges include rising trade deficits, limited use of FTA benefits by exporters, and manufacturing distortions.
Rising Trade Deficits
The GTRI report highlights a sharp increase in India's trade deficits with key FTA partners. For instance, India's trade deficit with ASEAN countries surged by 381.4% from the pre-FTA period of 2007–09 to 2023–25. Similarly, deficits with South Korea and Japan rose by 267.9% and 317.9%, respectively. In contrast, India's trade deficit with the rest of the world increased by 142.2% during the same period.
| Country/Region | Pre-FTA Deficit (Billion USD) | 2023–25 Deficit (Billion USD) |
|---|---|---|
| ASEAN | 6.8 | 33 |
| South Korea | 4 | 14.7 |
| Japan | 3.4 | 14.2 |
Tariff Asymmetry
A fundamental mismatch in tariff structures is a major factor behind these deficits. While many of India's FTA partners, such as Singapore and Japan, maintain low average tariffs, India's trade-weighted MFN tariff remains around 12.6%. This disparity means that FTAs often benefit foreign exporters more than Indian ones.
- Singapore: Zero MFN tariffs
- Japan, Australia, Malaysia, UAE: Below 4% average tariffs
Underutilization of FTA Benefits
The report also notes that only 20–30% of India's eligible exports utilize FTA benefits. The costs associated with claiming preferential treatment, such as satisfying rules of origin and obtaining certificates, often outweigh the benefits, especially when MFN tariffs in destination markets are already low.
Inverted Duty Structures
India's trade agreements have exacerbated inverted duty structures, where duties on raw materials are higher than on finished products. This issue affects sectors like steel, chemicals, and textiles, where inputs attract higher duties than finished goods imported under FTAs.
Manufacturing Shifts Abroad
The report suggests that these inverted duty structures incentivize manufacturing outside India. Companies, including those from China, are investing in ASEAN countries to benefit from lower production costs and duty-free access to the Indian market.
The GTRI report underscores the need for India to address these challenges to maximize the benefits of its trade agreements and support domestic manufacturing.
Sources:
