Four challenges that demand attention in India’s FTAs

Source: The post “Four challenges that demand attention in India’s FTAs” has been created based on “Four challenges that demand attention in India’s FTAs”, published in “Indian Express” on 09th June 2026.

UPSC Syllabus: GS-3- Indian Economy

Context: India has signed multiple FTAs to increase exports, attract investments and integrate with global value chains. However, several challenges have emerged that require policy attention.

Major Challenges Associated with India’s FTAs

1. Rising Trade Deficits

1. India’s trade deficit with ASEAN increased by 381 per cent between the pre-FTA period and 2024-25.
2. India’s trade deficit with Japan increased by 318 per cent, while the deficit with South Korea increased by 268 per cent during the same period.
3. India’s average annual trade deficit with ASEAN, Japan and South Korea has reached nearly $62 billion over the last three years.
4. The newer FTAs with the UAE, Australia, Mauritius and EFTA countries have also resulted in a trade deficit of more than $50 billion in FY2025.
5. The reduction of tariffs under FTAs has increased imports faster than exports.

2. Low Utilisation of FTA Benefits by Indian Exporters

1. Most FTA partner countries already maintain very low or zero MFN tariffs on imports.
2. Indian exporters therefore receive only limited additional market access through FTAs.
3. Exporters have to comply with rules of origin, certification requirements and extensive documentation.
4. Many small firms find the compliance costs higher than the tariff benefits available under FTAs.
5. As a result, only about 20–30 per cent of eligible Indian exports utilise FTA preferences.

3. Worsening Inverted Duty Structure

1. Indian manufacturers often pay higher duties on imported raw materials and intermediate goods.
2. At the same time, many finished products from FTA partner countries enter India at low or zero customs duties.
3. Duties on inputs such as steel, aluminium, chemicals, plastics and rubber increase domestic production costs.
4. This situation reduces the competitiveness of Indian manufacturers in both domestic and international markets.
5. The inverted duty structure discourages higher domestic value addition and weakens the objectives of Make in India.

4. Relocation of Manufacturing to FTA Partner Countries

1. FTAs have created incentives for firms to shift production to ASEAN countries.
2. Countries such as Vietnam, Thailand and Indonesia are increasingly becoming manufacturing hubs for supplying the Indian market.
3. Chinese companies and some Indian firms have established production facilities in these countries to benefit from lower costs and duty-free access to India.
4. When manufacturing abroad becomes cheaper than producing in India, investment and employment tend to move outside the country.
5. This trend promotes a “Make in ASEAN, Sell in India” model rather than “Make in India”.

Way Forward

1. The government should align tariffs on industrial inputs with FTA commitments to reduce cost disadvantages faced by domestic manufacturers.
2. The inverted duty structure should be corrected by ensuring that duties on raw materials are lower than those on finished products.
3. Exporters should be provided greater awareness, digital support and simplified compliance procedures to improve FTA utilisation rates.
4. India should strengthen domestic competitiveness through better infrastructure, logistics efficiency and lower transaction costs.
5. Periodic reviews of FTAs should be conducted to assess their impact on trade balance, manufacturing and employment.
6. The government and industry should work together to ensure that FTAs support domestic value addition and industrial growth.
7. Future FTA negotiations should focus on securing meaningful market access for Indian exports rather than only tariff reductions.

Conclusion: India’s FTAs have expanded economic integration but have also created challenges in the form of rising trade deficits, low export utilisation, inverted duty structures and relocation of manufacturing. Addressing these issues through tariff rationalisation, competitiveness enhancement and regular policy review will ensure that FTAs strengthen domestic manufacturing and advance the goals of Make in India.

Question:  India’s Free Trade Agreements (FTAs) have expanded trade opportunities but have also generated concerns regarding trade balance and domestic manufacturing.” Discuss the major challenges associated with India’s FTAs and suggest measures to address them.

Source: Indian Express