India’s billion-dollar trade juggernaut has an unwanted case of missing balance
India’s early FTAs promised a two-way trade highway, but 15 years later the traffic looks decidedly one-sided. Deficits with ASEAN, Japan and South Korea have ballooned as imports raced ahead of exports. Trade experts say the answer is not to shut the road, but to repair it — from tariff imbalances and non-tariff barriers to poor FTA utilisation and costly inputs at home.
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Context
Recent data analysis reveals that India's early Free Trade Agreements (FTAs) with Asian economies (ASEAN, Japan, South Korea) have led to a massive surge in trade deficits, with imports growing significantly faster than exports. Experts emphasize that while FTAs are not inherently undesirable, the structural asymmetries in tariffs, non-tariff barriers, and domestic manufacturing constraints require urgent review and course correction to ensure balanced economic outcomes.
UPSC Perspectives
Economic
The article highlights the critical issue of asymmetric tariff benefits in international trade. India historically maintained a high Most-Favoured-Nation (MFN) tariff rate (averaging 12.6%), while its FTA partners like Singapore and Japan were already low-tariff economies. Consequently, when tariffs are eliminated under an FTA, partner countries gain a substantial price advantage in the Indian market, whereas Indian exporters gain only a marginal benefit abroad. Furthermore, the issue of an inverted duty structure—where raw materials imported into India face higher duties than finished products—severely undermines the competitiveness of domestic manufacturing. This structural flaw discourages value addition within the country and makes imported finished goods cheaper than domestically produced ones. Resolving these domestic transaction costs and infrastructural deficiencies is essential for improving export competitiveness, independent of FTA benefits.
Governance
The analysis underscores a significant gap in policy evaluation and institutional memory regarding trade agreements. Experts note a lack of comprehensive, official reviews assessing the specific gains and losses from first-generation FTAs over the past 15 years. Effective governance in trade policy requires a shift from merely securing market access to ensuring market utilisation. This necessitates regular 'course correction' studies to identify where imports have surged detrimentally and where Indian exporters have failed to capture market share. For upcoming FTAs (e.g., with the UK or the EU), India's negotiating stance must evolve from 'FTA 1.0' to 'FTA 2.0', prioritizing reciprocity, robust Rules of Origin (criteria to determine the national source of a product), and mechanisms to counter non-tariff barriers.
International Relations
India's engagement in multilateral and bilateral trade pacts is frequently constrained by Non-Tariff Barriers (NTBs) imposed by partner nations. Even when tariffs are reduced to zero, Indian exports often face stringent Sanitary and Phytosanitary (SPS) measures (standards for food and agricultural safety) and Technical Barriers to Trade (TBT) (product standards and certification requirements) in markets like Japan and South Korea. These measures often negate the intended benefits of preferential market access. Future trade negotiations must focus on securing mutual recognition of testing and certification standards, as well as negotiating greater market access for services and professionals, to ensure a truly level playing field and deeper integration into global value chains.