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Rise Of FTAs In India: What's Changed And Why Now? — BQ Explains

India's deliberations with the U.S., U.K. and the EU for trade agreements highlight a directional shift to the west.

<div class="paragraphs"><p>(Source: Unsplash/Kurt Cotoaga)</p></div>
(Source: Unsplash/Kurt Cotoaga)

Trade is changing, and bilateral trade even more so as countries look for resources closer to home in the face of growing geopolitical tensions.

Following the India-Australia Comprehensive Economic Cooperation Agreement in December last year, India is now looking to sign bilateral trade pacts with the United Kingdom, European Union, and the Indo-Pacific Economic Framework grouping. Discussions on the pact with Canada, however, remains halted with the last round held in July.

According to experts, the benefits accrued to India are much lesser than what India can offer in terms of market access for goods trade. But the discussions also serve as a starting point for conversations around non-tariff measures and services trade, which is more crucial for India.

India’s merchandise export during FY23 was at $4,50,427 billion and services export amounted to $322.7 billion. Similarly, in the current year, services trade till September reached $164.9 billion, helping close the trade deficit gap in a year of slow global goods trade.

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The India-U.K. FTA And What It Means For Our Country — BQ Explains

The New FTAs Are Heading West

India's deliberations with countries like the U.S., U.K. and the EU for trade agreements highlight a directional shift.

The partner countries and the subject of the agreements are clear markers of change, according to Ajay Srivastava, founder of Global Trade Research Initiative.

The focus is shifting from east to west where in the past, all of India's regional trade agreements were with neighbouring countries, he told BQ Prime. India has so far signed 13 free trade agreements with trading partners such as Sri Lanka, Nepal, Bhutan, Thailand, Singapore, South Korea, Japan, Malaysia, Mauritius, United Arab Emirates and Australia.

Two of the trade agreements that are in effect are with groupings like the South Asian Free Trade Agreement—where the partner countries are Pakistan, Nepal, Sri Lanka, Bangladesh, Bhutan, the Maldives and Afghanistan.

The other is the India-ASEAN comprehensive economic cooperation agreement with signatories like Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam.

"Many of these countries are part of the SAARC or ASEAN grouping and there is Japan and Korea, too, which are in the east. This is except for UAE and Mauritius which are located slightly to the west but they are smaller in comparison. If we look at this year, the talks are with western countries such as U.K., EU and Canada," he told BQ Prime.

Srivastava also added that in the past, the primary focus was on traditional subjects which include goods, services, and investments as compared with the inclusion of more non-tariff subjects now.

Now, apart from traditional subjects, the big time focus is on the newer areas which impinge on the domestic regulations such as digital trade, sustainability, environment, gender, MSME, etc.
Ajay Srivastava, former Indian Trade Service officer, GTRI Founder

Biswajit Dhar, a distinguished professor at the Council for Social Development, New Delhi, argues that perhaps the move towards the west is not new.

One way to look at it is that with time, most eastern economies were covered. And if you want to pursue this strategy of more bilateral FTAs, then it has to be the west," Dhar told BQ Prime.

Why Is There An Increased Focus On FTAs?

Bilateral and regional trade talks have found increasing relevance with growing geopolitical tensions that threaten supply chains. Speaking in Sri Lanka, Indian Finance Minister Nirmala Sitharaman also noted that multilateral treaties are receding and bilateral trade agreements are on the rise. 

Piyali Majumder, an associate fellow at the National Council of Applied Economic Research attributed this rise to the global pandemic and the geopolitical tensions that have followed, which has unveiled vulnerabilities of the global production network. This, she explained, has made countries diversify their trade partners to minimize shocks and uncertainties in their supply chain.

It is not just India but all other major economies of the world like the U.S., Australia, Japan, etc., are engaging in bilateral or regional trade agreements. While this might imply a threat to multilateralism, bilateral and regional agreements are the future contours of the liberalised global trade order.
Piyali Majumder, associate fellow, NCAER

She also concurred on the changing nature of FTAs and highlighted a trend where traditional trade agreements are now becoming deep trade agreements.

The World Bank defines DTAs as reciprocal agreements between countries that cover not just trade but additional policy areas—such as international flows of investment and labour, and the protection of intellectual property rights and the environment, among others.

Balancing The Scales

In terms of the ongoing India-U.K. FTA, the gains of each partner country have increasingly come under scrutiny. While the trade offers Britain inroads into the Indo-Pacific region and market access to India, the merchandise trade benefits to India may be lower as many goods already face fewer or reduced tariff barriers. 

"India is one of the few countries where normal tariffs are still on the higher side. Most of the developed countries have brought down their industrial tariffs to 2-3%. More than 60% of industrial goods are traded at 0% duty in those countries," GTRI's Srivastava said.

According to him, in the case of India, many of the goods don’t gain from FTAs, except a few specific sectors depending on the region. While a reduction in duties is still welcome, he noted that the advantage is not much.

So, Why Is India Still Keen On FTAs?

The negotiations allow India to address other non-tariff measures. This includes the mutual recognition of standards with partner countries, which gains more relevance, particularly for services, according to Professor Dhar.

"(In FTAs) we look at services trade, too, and not just merchandise, and try to dovetail the two. Sometimes we succeed and sometimes we don’t, but it's an ongoing process and India is on the lookout for better Mode 4 access in terms of services," he said.

According to WTO, there are four modes of delivery of services, such as cross-border trade, consumption abroad, commercial presence and lastly, the temporary movements of persons, which falls under Mode 4.

To aid discussions, Dhar also called for the Indian government's demands to be put in the public domain as it would foster independent scrutiny. "We've known the negotiating position of Brits, and that of the EU for over a year. It helps to know the negotiating points of the Indian government, at least to keep speculation away," he said.

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Impact To Domestic Industry

With the interest in regional trade agreements, it is important to ensure that an influx of cheaper/high quality foreign products is not displacing domestic manufacturers, according to NCAER's Majumder.

She called for the need for a detailed economic rationale that specifies the "bilateral comparative advantage" between countries and assesses the export potential.

"Too many overlapping trade agreements may lead to complexities in the rules of origin leading to underutilisation of the trade agreements... Assessing the distributional impact of benefits on the domestic economy in terms of income, wage, environment, etc., will be critical," Majumder said.

Speaking on behalf of exporters and industry, Sanjay Budhia, chairman of the CII National Committee on Exports and Imports, said that FTAs can greatly help domestic manufacturing and boost exports, but to realise their full potential, there needs to be emphasis on the utilisation of FTAs.

"Sectoral-specific programmes can help the industry to understand the given benefits and allow them to use these signed FTAs in better ways."

To leverage and better utilise FTAs, there is a need to create awareness programmes at regional levels for exporters and market facilitation portals for Indian businesses, including all tariff and certification requirements, Budhia said. Trade fairs, events, capacity-building sessions, delegations, exhibitions and promotion of products are other measures to promote trade between FTA countries.

According to him, the special focus must be on standards as many Indian exporters are unaware of the stringent quality standards that are required in international markets. In addition, the infrastructure and testing facilities available to Indian exporters are often inadequate to ensure that products meet international quality standards, he said.

He suggested that the government should also take proper steps to sample the export cargo, as per the destination’s market regulations to avoid rejections upon arrival at the destination ports.

The rejection of export consignments owing to quality issues is a significant concern for Indian exporters. It not only results in financial losses but also tarnishes the reputation of Indian products in the international market.
Sanjay Budhia, Chairman of the CII National Committee on Exports and Imports

We don’t need to see implementation to anticipate the impact, says GTRI's Srivastava. "It’s in the design of the FTA. With most developed countries, our gains will only be limited and we will only gain when we have good quality products and services."

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