Whalesbook
India's government has been active in signing new Free Trade Agreements (FTAs), but a significant gap remains between these pacts and their use by businesses. This disconnect highlights a key problem in turning policy into real economic benefits. While the government pursues a more sophisticated FTA strategy, it's now up to businesses to actively use these agreements to boost exports and draw in investment.
The Underutilized Frameworks
Commerce Secretary Rajesh Agrawal pointed out a major issue: India's track record for FTA use is poor, with only about 25% of exporters benefiting. This is far behind developed countries (70-80% utilization) and emerging economies like Vietnam (40-50%). The main problems include low business awareness, complicated rules of origin, and extensive paperwork. As a result, despite significant market access opportunities, the potential for trade and export growth, especially in value-added sectors, remains largely untouched. Historically, major FTAs signed between 2010 and 2012 were followed by a slump in merchandise exports.
Strategic Shift in Trade Pacts
India's current FTA strategy is different from its earlier protectionist stance and 'look east' focus. New agreements are carefully designed to target economies that complement India, have large market potential, and are likely to attract significant foreign direct investment (FDI). These pacts go beyond cutting tariffs, including rules for services, intellectual property, and protecting sensitive domestic industries. This targeted approach has shown promise, with merchandise trade growing 92% with strategic FTA partners between FY 2020-21 and FY 2024-25, far exceeding global trade growth of 41.5%. This is a change from earlier FTAs with ASEAN, Japan, and South Korea, where trade deficits widened.
Global Benchmarks and Trade Impact
While India actively signs agreements, its low utilization rate is much lower than that of global peers. Countries such as Vietnam, Mexico, and Chile engage more actively with their FTAs. The U.S., via agreements like NAFTA, saw significant growth in exports and investment. Smaller nations often act as 'Free-Trade Stalwarts,' using FTAs for market access, while large economies like China use them more selectively. For India, ongoing trade deficits, especially with China and ASEAN, act as a significant hindrance, worsened by agreements that favor imports more than exports. Merchandise exports grew just 0.14% in FY2024-25, while services exports rose strongly by 13.6%. Even with tariff cuts, India's average applied tariff is still relatively high compared to some partners.
Structural Hurdles and Risks
The main risk for India's FTA strategy is that domestic businesses fail to use the agreements effectively. This lack of business action could make even well-negotiated deals ineffective. Also, significant non-tariff barriers (NTBs) in partner markets, such as tough quality and environmental standards (like the EU's Carbon Border Adjustment Mechanism), create hurdles for Indian exporters. Concerns also exist about the misuse of Rules of Origin, which could allow goods, particularly from China, to enter India indirectly via FTA partners. Traditional sectors like agriculture are vulnerable to increased import competition. This concern previously led India to adopt more cautious trade policies, like withdrawing from RCEP. This structural weakness in utilization and vulnerability to imports, combined with widening trade deficits, presents a clear risk to the expected economic benefits from these agreements.
Policy Support and Future Steps
The government knows FTAs are not enough on their own. Efforts are being made to align industrial policy with trade goals, shown by Production-Linked Incentive (PLI) schemes aimed at boosting domestic manufacturing and attracting FDI. The path forward requires a two-pronged strategy: continuing to negotiate strategically with complementary economies and, crucially, implementing measures to improve business awareness, simplify compliance, and tackle non-tariff barriers. Without greater business engagement and steps to address structural barriers, the full economic potential of India's new FTA framework risks remaining unrealized.