FTAs Shaping India’s Global Presence

The recently concluded India-UK Free Trade Agreement represents a watershed moment in bilateral relations, offering crucial market access amid global trade uncertainties. Notably, India has shown unprecedented flexibility by incorporating non-trade elements like labor rights, signaling a significant policy evolution. India's overall stance on FTAs has undergone a remarkable transformation in recent years. Once hesitant about trade liberalization, India now actively pursues strategic trade partnerships as evidenced by agreements with EFTA, UAE, and Australia.  

How do Free Trade Agreements Enhance India’s Strategic and Economic Interests? 

• Increased Market Access for Indian Goods: FTAs significantly expand access to foreign markets by reducing tariffs and non-tariff barriers. 
  • For instance, the India-UAE CEPA ensures duty-free access to over 90% of India's exports, including textiles, gems, and pharmaceuticals.  
  • This preferential access is vital as it helps Indian industries gain competitiveness, especially in labor-intensive sectors.  
    • India’s exports to the UAE grew 12% in the first year of the CEPA's implementation. 
• Enhanced Investment Opportunities: FTAs encourage foreign direct investment (FDI) by providing a stable and predictable environment for investors.  
  • The India-Australia Economic Cooperation and Trade Agreement (ECTA) offers substantial tariff eliminations on key sectors, bolstering investor confidence.  
  • By lowering trade barriers, India attracts increased FDI flows, vital for sectors such as technology, manufacturing, and infrastructure.  
    • As of 2024, FDI inflows from Australia have surged 25%, indicating the positive impact of the ECTA in enhancing investor confidence. 
• Improved Competitiveness of Indian Businesses: Trade liberalization under FTAs fosters competition, forcing Indian companies to innovate and improve efficiency.  
  • In sectors like textiles, the India-ASEAN FTA has boosted Indian exports by reducing tariffs on key products like apparel.  
  • For example, India’s textile exports to ASEAN nations grew by 15% post-FTA, improving India's competitiveness in the region. This ensures sustained long-term growth for Indian industries. 
• Strengthened Services Sector: FTAs, especially with developed nations, offer better access for Indian services, including IT and healthcare.  
  • The India-UK FTA, for example, opens up easier access to the UK labor market for Indian professionals, particularly in IT and healthcare sectors.  
  • Such provisions will not only generate employment for Indian professionals abroad but also increase remittances.  
    • India's IT exports, which constitute nearly 25% of total services exports, are expected to see growth, with the UK accounting for 17% of this share post-FTA. 
• Agricultural and Rural Sector Benefits: FTAs with partner countries open new markets for Indian agricultural exports, improving rural income levels.  
  • The India-Mauritius CECPA has enhanced India’s agricultural exports by cutting tariffs on products like sugar and tea.  
  • By promoting agriculture-focused trade, FTAs provide farmers with new opportunities for exports.  
• Technology and Knowledge Transfer: FTAs facilitate technology transfer, especially in sectors like manufacturing, green energy, and digital infrastructure.  
  • The India-Australia ECTA provides India access to advanced Australian technology in sectors like renewable energy, which is crucial for India’s energy transition.  
    • The ECTA is also expected to reduce carbon emissions in India, boosting both environmental and economic sustainability. 
• Support for Small and Medium Enterprises (SMEs): FTAs open up global markets to SMEs, offering them the opportunity to scale up their operations.  
  • The India-Singapore CECA has particularly helped Indian SMEs in sectors like engineering and information technology gain market access to Singapore, which acts as a gateway to ASEAN.  
  • This access helps Indian SMEs grow by engaging in global value chains (GVCs), which provide a broader market for their products. 
• Regulatory Harmonization and Reduced Trade Barriers: FTAs help harmonize regulations across countries, making it easier for businesses to operate in partner markets.  
  • For instance, the India-EFTA TEPA, signed in 2024, facilitates easier movement of goods and services by aligning product standards and certifications across India and European countries.  
  • This regulatory alignment reduces the cost of compliance and trade disruptions.  

What are the Major Concerns Associated with India’s Free Trade Agreements?  

• Trade Deficits and Imbalanced Gains: One of the key concerns with India’s FTAs is the growing trade deficits with several partner countries, particularly ASEAN and UAE. 
  • While India gains preferential access to markets like the UAE, it faces an increasing import intensity, especially from ASEAN.  
  • The India-ASEAN FTA has led to a significant rise in imports to $44 billion in FY23, compared to $8 billion in FY13.  
    • While India’s share in ASEAN's exports remained stagnated, highlighting the imbalanced benefits of such agreements. 
• Limited Market Access in Developed Economies: Despite tariff reductions, India faces challenges accessing markets in developed economies due to non-tariff barriers, such as stringent regulatory standards.  
  • The India-EU FTA, for instance, has faced delays over issues like intellectual property rights (IPR) and data localization, restricting full access to the European market.  
  • The share of the European Union in India's overall goods exports declined from 18% in 2001 to 14% in 2020, indicating barriers beyond just tariff reduction. 
    • These non-tariff barriers often negate the benefits of lower tariffs. 
• Vulnerability of Small Farmers and Unorganized Sectors: FTAs expose Indian farmers and small-scale industries to intense global competition, particularly in agricultural and labor-intensive sectors.  
  • For instance, the India-ASEAN FTA has impacted India’s domestic agricultural sector, especially rubber farmers in South India, who face price suppression due to cheaper imports from ASEAN nations.  
    • As the market becomes flooded with imports, the livelihoods of small producers in unprotected sectors are increasingly at risk. 
• Job Losses in Certain Sectors: While FTAs promote growth in many sectors, they also result in job losses in industries that cannot compete with cheaper imports.  
  • The India-UAE CEPA, for instance, while beneficial for exports in textiles, has led to the erosion of jobs in certain manufacturing sectors that struggle to compete with cheaper imports from the UAE and other countries. 
  • The textile industry has seen a dip in domestic production capacity (though improved only recently) due to heightened competition. This highlights the risk of losing domestic employment in specific sectors. 
• Environmental and Labor Standards Concerns: Many of India’s FTAs, such as those with the EU and the UK, have incorporated clauses on labor rights and environmental standards.  
  • However, India’s reluctance to fully embrace these standards often limits the effectiveness of such agreements in promoting sustainable trade.  
  • The India-UK FTA includes provisions for labor rights, yet India has resisted fully binding labor provisions, fearing the negative impact on domestic policy autonomy.  
  • Moreover, environmental clauses like the Carbon Border Adjustment Mechanism (CBAM) threaten to impose taxes on carbon-intensive products like steel and cement, posing a competitive disadvantage. 
• Monopoly and Market Power Concerns: India’s FTAs often fail to address issues of monopoly and restrictive trade practices, which disproportionately benefit large corporations over small businesses.  
  • The India-UAE CEPA, for example, lacks provisions to prevent market dominance by big firms, particularly in sectors like textiles and pharmaceuticals.  
  • India’s pharmaceutical exports have seen growth, but a 2018 CCI investigation found that Indian pharma companies were facing anti-competitive practices, which could worsen under FTAs if not properly regulated.  
    • These unregulated practices can undermine the competitive environment for Indian businesses. 
• Lack of Effective Dispute Resolution Mechanisms: FTAs often lack robust mechanisms for resolving disputes, particularly in the case of trade barriers that unfairly impact one side.  
  • India’s experience with the ASEAN FTA has shown that when trade barriers are erected, such as restrictions on agricultural exports or excessive tariffs on machinery, the existing dispute resolution frameworks are often too slow to offer timely solutions. 
  • For instance, the India-ASEAN dispute over palm oil exports. India contends that non-reciprocity in FTA concessions, non-tariff barriers, import regulations, and quotas have hindered its exports to ASEAN. 
• Strategic Dependence on FTAs for Global Trade Integration: Critics argue that India’s rush towards signing FTAs can lead to strategic dependence on these agreements for access to global markets, which can undermine multilateral efforts like those at the WTO.  
  • With India negotiating over a dozen FTAs simultaneously, it risks diluting its bargaining power in multilateral trade negotiations. 

What Measures Can India Adopt to Further Strengthen its FTAs?  

• Enhance Domestic Competitiveness through Capacity Building: India should focus on strengthening the competitiveness of its domestic industries, especially in sectors exposed to global competition under FTAs.  
  • This can be achieved through targeted investments in technology, research and development, and skill development programs.  
  • Strengthening the domestic supply chain, particularly in high-growth sectors like electronics, pharmaceuticals, and textiles, will ensure that Indian businesses can compete effectively in global markets. 
• Strengthening Dispute Resolution Mechanisms: India must advocate for stronger, more efficient dispute resolution mechanisms within its FTAs to ensure fair treatment and timely resolution of trade issues.  
  • Establishing a robust and transparent framework for resolving trade disputes can help prevent unnecessary delays and protect India’s interests in trade relations. 
  • This would involve integrating clear timelines, penalties for non-compliance, and more accessible legal recourse for Indian exporters and businesses. 
• Incorporating Sustainable Trade Provisions: With global trade moving toward sustainability, India should push for FTAs that include clear and binding provisions on environmental protection, climate change, and sustainable practices.  
  • Incorporating these aspects into trade agreements will not only promote green technologies and sustainable industries but will also ensure India’s industries remain competitive in the growing global market for environmentally conscious products. 
• Strengthening Labor and Social Standards: India should work towards integrating fair labor standards and social protections within its FTAs to safeguard the rights of workers while engaging in international trade.  
  • These provisions can help avoid exploitation in sectors like textiles and agriculture, which are vulnerable to price fluctuations.  
  • By balancing economic interests with labor welfare, India can improve working conditions and foster more inclusive trade policies. 
• Diversification of Trade Partners and Product Sectors: India needs to diversify its trade partners and product sectors under FTAs to reduce over-reliance on a few markets or industries.  
  • By pursuing agreements with a wider range of countries and focusing on non-traditional sectors like digital services, green energy, and advanced manufacturing, India can create new opportunities and ensure that it remains resilient to changes in global trade dynamics. 
• Promoting Digital Trade and E-Commerce Integration: Incorporating digital trade frameworks within FTAs is crucial for India’s participation in the rapidly growing global e-commerce ecosystem.  
  • India should negotiate provisions that facilitate data flows, digital trade, and cross-border e-commerce, ensuring that Indian businesses, especially SMEs, can easily access global digital markets.  
  • This would involve provisions for data localization, intellectual property protections, and regulatory harmonization for digital goods and services. 
• Promoting Investment Protection and Facilitation: India should negotiate Bilateral Investment Treaties (BITs) alongside its FTAs to provide greater protection for foreign investors and enhance bilateral investment flows.  
  • This includes ensuring fair and transparent treatment of investors, dispute resolution mechanisms, and protection against expropriation.  
  • A robust investment protection framework will encourage foreign capital, technology transfer, and job creation in strategic sectors. 
• Monitoring and Adapting Trade Agreements Based on Changing Global Dynamics:  India should establish a dedicated mechanism to continuously monitor the outcomes of FTAs and adjust policies based on emerging global trends and domestic needs. 
  • This could involve periodic reviews, public consultations, and collaboration with industry stakeholders to ensure that FTAs remain relevant and adaptive to the evolving economic landscape.  
    • By staying flexible and responsive, India can maximize the long-term benefits of its trade agreements. 

Conclusion:

India’s FTAs enhance market access, boost exports, attract FDI, and improve global competitiveness. They support key sectors like services, agriculture, and SMEs while enabling technology transfer. To strengthen FTAs, India must build domestic capacity, ensure fair dispute resolution, and promote sustainable, inclusive trade. 

Drishti Mains Question: Assess the role of Free Trade Agreements (FTAs) in advancing India’s strategic and economic interests. Discuss the key benefits and challenges associated with India’s FTAs, and suggest measures to optimize their impact on the country's growth and development.