India’s Revamped FTA Strategy

Context: India’s revamp of Free Trade Agreement (FTA) policy is a welcome move, but there are many challenges to be addressed.

India’s aversion to FTAs

• India has not signed any major FTA in the last 10 years, when the cumulative number of regional trade agreements in force globally has increased from 224 to 350.

• India signed its last major trade agreement, a Comprehensive Economic Cooperation Agreement (CECA) with Malaysia in 2011.

• Withdrawal from RCEP: India withdrew from the Regional Comprehensive Economic Partnership (RCEP) in 2019, after seven years of negotiation. 

Recent change in stance in India’s FTA policy

• Renewed interest in trade agreements through Early Harvest Schemes (EHS) with Australia and UK.
• An EHS is a limited trade initiative that will undertake liberalisation of trade in a small set of commodities.

Challenges associated with EHS trade policy

• At odds with global trends when developing and developed countries actively pursuing membership of deeper FTAs. Global trade over the last two decades has been dominated by Global Value Chain (GVC) activity.
• India’s aversion for trade liberalisation to be continued: India hesitates to offer “substantially all trade” (Requirement for FTA as per WTO) interpreted as “80-85 per cent or more” preferential tariff lines in its FTAs. This stance is continued in EHs also.

• High tariffs and protectionism continue: Sectors like auto sector and alcoholic beverages, dairy etc remain protected with high tariffs and it is unlikely for India to make a shift in this regard.

• Experience show reluctance to graduate to FTAs: EHS with Thailand still not graduated to FTA after 17 years of existence.
• Limited scope for integration with trade agreements with UK and Australia: As

• These economies will not offer India the opportunity to integrate with low-skill, labour-intensive supply chains that may be shifting out of China during and after the pandemic.
• Both countries have value chains that are technology and knowledge intensive.

Way Forward:

• EHS shall be accompanied by a FTA framework with a definite timeline for completion of negotiations.
• Increasing depth of FTAs with GVC-intensive East Asia and ASEAN member economies: As these economies provide India the opportunity to intensify its low-skill, labour-intensive backward integration in trade and GVC dynamic sectors like electronics and automobiles.