India decided to back off from the Free Trade Agreement (FTA) negotiations. The focus is now on reviewing the government procurement policies, which have been proven to spur domestic manufacturing and support Micro and Small Enterprises (MSEs). However, the European Union and the United Kingdom form an attractive market, even though in the past data shows Indian exports have earned mere benefits. This pause will play a crucial role in safeguarding its domestic policies not to be compromised at the altar of future trade agreements while it is reaping mileage for local industries.
| GS Paper | GS Paper II, GS Paper III |
| Topics for UPSC Prelims | Free Trade Agreement, European Union, Comprehensive Economic Partnership Agreement, European Free Trade Association, Australia-India Economic Cooperation and Trade Agreement, SPS (Sanitary and Phytosanitary), South Asian Free Trade Agreement, EU’s Carbon Border Adjustment Mechanism, Regional Comprehensive Economic Partnership, India Stack. |
| Topics for UPSC Mains | Benefits of Free Trade Agreements for India, Key Issues Related to India’s FTAs |
This editorial is based on “Welcome rethink on FTAs” published in The Hindu Business Line on 21/10/2024, discussing India’s strategic halt in FTA negotiations to protect domestic interests.
UPSC students must learn about the attitude of India regarding FTAs. It is related to the syllabus of UPSC International Relations and Economic Development. This subject will help aspirants understand how the complexities of international trade, government policies, and their resultant impacts directly influence the economy of India, which is necessary for both Prelims and main examination preparations.
If UPSC aspirants are interested in such an India strategic halt in the FTA negotiations, it will not only impact domestic policies but also influence international trade dynamics. It speaks to the balancing act involved in protecting national interests and engaging with global trade – a common theme in questions on trade policies and economic development.
India has strategically decided to put its FTA negotiations into cold storage to reassess procurement policies. This move speaks volumes about safeguarding domestic interests while carrying forward international trade.
Procurement policies of the government shall be of paramount importance for MSEs and to promote domestic manufacturing. Significant achievements supported by these policies in FY 2023-24 were: procurement worth ₹82,630.38 crore. This very approach is not just for local industries but also for the ‘Make in India’ initiative to promote sustainable economic growth with resultant employment generation.
The European Union and UK markets are considered very attractive. The historical data, however, reveals that the Indian exporter has not had many opportunities in those markets. These markets have also not borne many fruits for Indian business. Reality does call for the reconsideration of the FTAs made with great prudence so that, at least about trade policy, the economic objectives of India are not negated and of course, there are benefits available for the Indian exporters.
FTAs help India in the strengthening of market access and export growth. FTAs open international markets and herald economic growth and development. Entry into FTAs may be capitalized to capitalize on the competitive strength of the country and expand trade footprints in the global scenario.
The India-UAE FTA is one example of how FTAs can accelerate growth in exports. Indian exports, after signing the FTA, picked up by 11.8% and FY23 garnered $31.3 billion. Preferential access for Indian goods to 97% of the UAE’s tariff lines has brought growth to sectors such as textiles, gems and jewelry, and engineering goods, among others.
The recent agreement between the European Free Trade Association is one example where FTAs can attract significant investment inflow. With a $100 billion commitment in 15 years, this particular agreement aligns the trade access with the investment promises by which India’s manufacturing ambition receives much-needed support. Such investment indeed adds to ‘Make in India’ which helps employment generation as well as leads to technology flow.
FTAs play a very important role in building resilient, diversified, and sustainable supply chains. Thus, the Australia-India ECTA will give access to critical minerals necessary for India’s green technology and EV manufacturing. FTAs promote negating dependence on single sources for global supply chains.
Today, high-tech FTAs enable technology transfer and innovation ecosystems. For instance, the India-Japan CEPA has furthered new manufacturing technologies in India, especially in the electronics and automotive manufacturing fields. This leads to creating strong technological capabilities for India that help foster growth and competitiveness.
FTAs yield big positives for India’s services sector. The UAE CEPA has provisions like mutual recognition of professional qualifications and easier visa access to skilled professionals. These will enhance professional mobility and open doors to international markets for Indian talent.
FTAs drive quality improvements and competitiveness across Indian industries. The textiles sector, for instance, has seen notable export growth to Australia, driven by quality upgrades to meet international standards. Similarly, pharmaceutical exports have increasingly met global benchmarks, enhancing India’s global competitiveness.
Despite the merit aspects, FTAs face challenges like trade deficits and challenges that arise due to rules of origin. These problems require a strategic approach so that FTAs appeal to all economic interests of India and do not adversely affect its industries.
Since its introduction, India’s trade deficits with FTA partners have risen. For instance, it has always faced a humongous trade deficit with ASEAN, threatening to turn into a serious case of imbalance. A balanced approach in FTA negotiations should therefore be ensured to ensure proper use of FTAs and rectify trade imbalances for sustainable economic growth.
Rules of origin particularly regarding the re-routing of Chinese goods is a great challenge. Curbing fraudulent claims, provision to strictly implement them, and preventing domestic industries from unfair competition would ensure India’s economic interests.
Though FTA has existed between India and several countries, nontariff barriers continue to exist and widen the chasm of access to foreign markets for Indian products. There is a need for strategic intercession in crossing compliance costs so that sectors like pharmaceuticals and food exports do not face regulatory bottlenecks about entering a particular country’s market.
FTAs negatively impact the domestic industries in general, and more specifically, the SMEs and the traditional sectors, such as agriculture. Cheap imports mount huge pressure on the producers. And also protective measures should be taken to protect these vital sectors in make them survive.
FTAs have not promoted any form of market access for India’s competitive service sectors. Very restrictive regulatory barriers in the partner countries further handicap Indian service providers, which requires negotiation to seek better market access and service liberalization.
Domestic policies in India and provisions of IPR in FTAs with developed partners have often been at loggerheads. Conflicts in general, particularly over pharmaceutical patents, require sensitive diplomacy to balance the protection of national interests with the promotion of international trade relations.
New-age FTAs come with environmental and labor standards that affect competitiveness. Cost of compliance along these lines will require strategic measures towards Indian industries staying competitive and compliant with international expectations.
India is significantly forced into considering the geopolitical aspect in its approach towards FTAs. With increased tensions with China and growing anxieties regarding market access and economic security, prudent participation in regional agreements is advisable to continue exercising strategic interests for India.
To ensure that the national interest is protected, India requires strategies wherein effective FTA negotiations can take place. The focus should be oriented toward improvement in domestic capacities, reinforcement of rules, and sector-specific growth.
Developing a data-driven framework for negotiation is necessarily an important step in effective FTA negotiations. Sector-specific impact assessments and analytics powered by AI enable India to make decisions and set clear thresholds around market access commitments.
The rules of origin must be strengthened through the efficacy of enforcement mechanisms to ensure that they are not misused. Further, the deployment of blockchain technology for real-time verification and induction of dedicated enforcement cells at major ports will protect domestic industries from unfair competition.
Potential pre-FTA launches: sector-specific programs to stimulate competitiveness. Technology upgradation as well as quality certification and other targeted support efforts would prepare the domestic industry better for global competition.
Removal of barriers and establishment of mutual recognition agreements will promote services trade. A comprehensive database of non-tariff barriers should be developed with dedicated service export promotion councils to enhance market access in Indian services.
This means that MSMEs should be included in FTAs with facilitation centers and digital platforms for export. MSMEs will then get the much-needed financial boost to obtain international certification and compliance, making them more competitive across the globe.
Proper protocols for secure exchange of data and digital trade systems need to be developed for smooth transactions across borders. Standard digital documents, as well as payment systems, will foster digital trade and enhance India’s global competitiveness.
It will also provide a strategic anchor for FTA partners through the identification of strategic value chains and the establishment of specialist industrial parks. Suppliers will be led through programs of development and skill initiatives. They are targeted toward the requirement of value chains and enable India to take advantage of opportunities in international markets.
Healthy reviews followed by safeguard measures based on the performance metrics will help ensure that FTAs are effective. A continuous dialogue with FTA partners and emerging issues will help save the national interest of India.
| Political: India’s decision to pause new FTA negotiations reflects a strategic move to safeguard domestic industries, particularly manufacturing and MSMEs. The government is reconsidering procurement policies to better protect these sectors. Additionally, geopolitical concerns, especially regarding China, shape India’s FTA strategies, ensuring national security and long-term political interests are preserved. Economic: India’s FTAs often lead to trade deficits, with imports surpassing exports, which negatively impacts the balance of payments. However, agreements like those with the UAE and European Free Trade Association promise increased foreign direct investment, boosting sectors like manufacturing, creating jobs, and expanding market access for textiles, jewelry, and green technology. Social: FTAs foster job creation by encouraging investments, but domestic industries, particularly MSMEs, face competition from foreign imports. This can negatively impact local employment unless supported by policies. FTAs, such as the India-UAE deal, enhance professional mobility by recognizing Indian qualifications, boosting the services sector and improving access to international job markets. Technological: Technology transfer is a major advantage of FTAs. The India-Japan agreement, for example, has facilitated advanced technology sharing, boosting innovation in various industries. To capitalize on such agreements, India needs to improve digital trade infrastructure, ensuring secure transactions and smoother cooperation. FTAs also help build resilient supply chains for critical technologies. Environmental: FTAs increasingly include sustainability standards, especially in deals with developed nations. This can raise compliance costs for Indian industries, but also promote environmentally friendly practices. Agreements like those with Australia help secure resources for India’s renewable energy goals. However, sectors like agriculture face competition from cheaper, environmentally harmful imports. Legal: Legal challenges in FTAs include pressures to adopt stringent intellectual property rights (IPR) laws, which could impact industries like pharmaceuticals. Indian exporters also face non-tariff barriers such as quality checks in FTA partner countries. Strengthening rules of origin is crucial to prevent third-party countries from exploiting FTAs to bypass trade restrictions. |
India’s strategic pause in its FTA negotiations comes against the backdrop of reviewing government procurement policies. Carefully without compromising the values of domestic manufacturing and MSEs. It should, therefore, plan its future trade agreement based on rigorous analysis and overcoming the lacunas already experienced. A balanced approach would thus help India reap the benefits while protecting its vital industries.
| UPSC Civil Services Examination, Previous Year Questions (PYQs) Mains Q. Craze for gold in Indians has led to a surge in import of gold in recent years and put pressure on the balance of payments and external value of rupee. In view of this, examine the merits of the Gold Monetization Scheme.(UPSC Mains 2015, GS Paper III) Q. Discuss the significance of Free Trade Agreements (FTAs) for India’s economic diplomacy. Analyze the benefits and challenges posed by the Comprehensive Economic Partnership Agreement (CEPA) and the Australia-India Economic Cooperation and Trade Agreement (ECTA). |
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