India's pursuit of Free Trade Agreements (FTAs) has been a cornerstone of its trade policy, aimed at fostering economic growth, enhancing competitiveness, and integrating into global value chains. However, recent data reveals a concerning trend: India faces a trade deficit with a majority of its key FTA partners. This situation raises questions about the effectiveness of these agreements and their impact on the Indian economy.
A recent Niti Aayog report highlighted this issue, revealing that in the second quarter of 2024-25, India's trade deficit with FTA countries increased by 23% year-on-year, reaching $26.7 billion. Exports to these countries saw a 4% decline, while imports grew by 5%. This disparity indicates that India's imports from FTA partners are increasing at a faster rate than its exports, contributing to the widening trade gap.
Several factors contribute to this imbalance. One significant reason is that India's exports are not growing as fast as its imports with FTA countries. Key regions like ASEAN, Singapore, and Australia have experienced notable declines in imports from India. While exports to Japan, Bhutan, and Sri Lanka have shown growth, they haven't been enough to offset the overall decline.
On the other hand, imports from FTA countries have seen substantial growth, with the UAE leading the way due to strong demand for key commodities. Imports from Japan, Thailand, and Mauritius have also witnessed strong growth. This surge in imports, coupled with sluggish export growth, has resulted in a persistent trade deficit.
India has trade deficits with nine of its top ten trading partners, including China, Russia, Singapore, and South Korea. The trade deficit with China, Russia, Korea, and Hong Kong increased in the last fiscal year. This dependence on imports from these countries puts pressure on India's domestic industries and its currency.
Several challenges hinder India's ability to fully utilize the benefits of FTAs. These include complex rules of origin, a lack of awareness among Indian exporters, and high import tariffs. Non-tariff barriers related to standards and certifications also pose a challenge. Moreover, India's export basket is skewed towards natural fibers, while global textile exports are moving towards man-made and technical textiles.
To address these challenges, India needs to adopt a more strategic approach to FTAs. This includes conducting thorough sectoral impact analyses before signing any FTA, incorporating safeguard clauses to protect vulnerable sectors, and promoting ease of doing business to enhance export competitiveness. Strengthening logistics and infrastructure, and launching awareness campaigns for MSMEs are also crucial.
Furthermore, India needs to focus on diversifying its export basket and enhancing its competitiveness in high-growth sectors such as textiles, pharmaceuticals, and IT services. It should also address non-tariff barriers and streamline regulatory processes to facilitate trade.
Despite the challenges, FTAs offer significant opportunities for India to integrate into global value chains, attract foreign investment, and boost economic growth. By addressing the existing imbalances and adopting a more strategic approach, India can harness the full potential of FTAs and strengthen its position in the global economy. The ongoing negotiations with the UK, EU, and the US signal a shift towards more calibrated engagement, where FTAs are tailored to align with India's economic goals and defensive interests. These modern FTAs encompass services, FDI, and digital trade principles, ensuring regulatory certainty and fostering innovation.
