One FTA Step At A Time

Context: We need to move forward on the FTA path cautiously, constantly weighing costs and benefits. The need is to increase qualitatively competitive manufacturing within the country, improve logistics and find an international market for Indian products. 

India’s bitter past experience with FTAs

• India’s withdrawal from the Regional Comprehensive Economic Partnership (RCEP) in 2019, the 15-member FTA grouping that includes Japan, China and Australia.
• Doubtful efficacy of FTAs:
  • NITI Aayog’s ‘A Note on Free Trade Agreements and Their Costs’ points out that India’s exports to FTA countries at 22% have not outperformed overall export growth or exports to the rest of the world, and imports through the FTA route have increased.
  • 2019 RBI paper on FTAs pointed out the increase in exports could not keep pace with a spurt in imports.
• Policy issues in India’s earlier FTA strategy:
  • Not taking trade and industry into confidence and make them partners in the FTA journey.
  • Trade associations failed the FTA process by not speaking for the entire industry. They only spoke about what government wants to hear.

Recent Positivity around FTA:

• In May 2021, India announced India-EU talks, which had stalled in 2013, would be resumed. 
• This was followed by the news that FTAs with other countries like the UAE, Australia and Britain, too, are in various stages of discussion, with a possible early ‘harvest’ in the offing.
• This comes in the wake of rejuvenated economic prospects:
  • The period April-July 2021 saw exports to the tune of $130.82 billion, a growth of 49% y-o-y. 
  • The ambitious $400 billion merchandise export target for 2021-22 now seems doable.

Way forward

• Bring policy clarity: India needs to be clear about why it wishes to have an FTA with a particular country.
• It shall be based on the present pattern of exports to the target country, impediments that exporters are facing, and prospects of FTA.
• FTAs shall look beyond merchandise and services and include investment opportunities in its ambit.
• Avoid policy contradictions: E.g. Protectionism in Aatmanirbhar Bharat policy.
• Preparing domestic industry: An FTA is a two-way street; thus, India needs to invest in preparing its domestic sector to meet duty-free or reduced duty competition and educate exporters to meet Non-Tariff Barrier challenges.