What should India’s FTA agenda be?

Source: The post is based on the article “What should India’s FTA agenda be?” published in the Business Standard on 22^nd September 2022.

Syllabus: GS 2: Bilateral, Regional and Global Groupings and Agreements involving India and/or affecting India’s interests.

Relevance: About India’s FTA agenda.

News: A view emerged that free trade agreements (FTAs) had not served India well. But this view is flawed.

In 2012, India signed trade agreements with Sri Lanka, Bangladesh, ASEAN, Japan and South Korea.

After a long gap, India has returned to the FTA negotiating table. Agreements have been signed with the UAE and Australia, and negotiations are at various stages of conclusion with the UK, Canada and the EU.

What are the concerns about India’s FTA agenda?

Little effect on India’s trade: FTAs accounted for 16% of India’s trade in 2000 and 18.5% of it now. However, they are not a disaster for the Indian industry.

Major trading partners remain non-FTA countries: The US, China and the EU are still out of India’s FTA agenda.

Withdraw from key FTAs: India withdrew from a key agreement with much of Asia — the Regional Comprehensive Economic Partnership or RCEP — in 2019. By dropping out of RCEP India has limited its access to Asia, the most dynamic part of the world economy.

Limited goods and services: Indian FTAs are inherently limited, leaving out many of the highest consumption items or imposing extended tariffs with long adjustment periods. On the other hand, ASEAN, China, South Korea and Japan have much wider and deeper FTAs.

Low participation in global value chains (GVCs): By excluding many items from the agreements, India limited the extent of the market and our ability to participate in various supply chains.

Impacts of simplistic thinking: While negotiating, India like exports and dislikes imports. By having this thought, India failed to understand that “a tax on imports is a tax on exports”.

For instance, the auto industry has suppliers that cascade down six tiers, where inefficiencies at any stage make higher tiers less competitive. Indian auto industry claims to be the most competitive location in the world for making small cars. But India argues vigorously against the inclusion of auto sector in FTAs with the UK and EU.

What should be India’s FTA agenda in future?

Sign essential FTAs: India needs FTAs with countries and areas that either matter to India today or will matter in the future. For instance, India should sign FTAs with a) Top current export markets such as the US, EU and Bangladesh, b) Top future export markets namely, Africa and Latin America, and c) Join the newly-minted Indo-Pacific Economic Framework as it provides access to the US, Indonesia, Japan, South Korea, Singapore, Vietnam and excludes China.

Expand India’s FTA agenda ambition: India should a) Focus on zero-for-zero agreements: These agreements usually exclude zero items and often apply zero tariffs in both directions, b) India should have greater confidence in its own capabilities. For instance, India must include automobiles and auto components in all the FTAs.

Increase India’s competitiveness: India should use FTAs to force competitiveness on firms. Firms, in turn, must force change in areas such as infrastructure, regulation and ease of doing business that reduce competitiveness.

Integrate trade and industrial policy: Production-linked incentive scheme is India’s key industrial policy. So, India should ensure all items covered by PLI are explicitly included in every FTA.

Capitalise on China+1 strategy: The world is looking for China+1 supply resilience. So, India should capitalise on that by including not only sectors that India is competitive in now such as white goods, textiles and garments, chemicals and pharmaceuticals but also sectors India can do well in future. This includes sectors such as e-commerce, electric vehicles, and data privacy.