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India’s Emerging FTA Strategy: Harnessing Global Demand

10 Jan 2022

With India’s exports exhibiting robust growth over 2021, the Indian Government has entered into discussions with different countries / regions for economic cooperation agreements. Expected to be concluded over 2022 and 2023, these agreements are likely to be different in nature from earlier such deals and would impart a fresh boost to India’s export trajectory.

The year 2021 stood out for a remarkable surge in global trade as a result of strong demand as the world made up for Covid restrictions in the previous year. As per an estimate of World Trade Organisation (WTO) in October 2021, global trade in goods in terms of volume was set to grow by 10.8% in 2021.

India’s trade paralleled this surge. During January – October 2021, exports rocketed by 44% over the same period last year to reach near $325 billion, surpassing the full calendar year figure of 2019. Similarly, import values at $460 billion expanded by over 55% in the first ten months of 2021, well over the total of $408 billion in 2019.

In this scenario, the Government has prioritized exports as a key economic growth driver. Through new trade and economic agreements, it intends to tap into global demand, particularly in advanced countries where growth has been strong over 2021. The renewed free trade agreement (FTA) strategy is one prong of this to enable expanded market access.

Due to many such FTAs in force across the world, India stands at a tariff disadvantage in major markets as it does not have trade agreements with large advanced economies or regions such as the European Union (EU). This makes Indian goods more expensive, especially for labour-intensive sectors such as textiles and leather where tariffs can make a difference to margins.

India’s FTA strategy is directed at reducing such tariff disadvantages and ensuring that Indian products are competitive in large market economies. The Government also aims to address growing and new markets and open up access through tariff reductions. It is further looking at new products that can be built up for these markets as well as ensuring that India is able to retain its market share for certain products.

Here are some of the FTA negotiations that India is undertaking:

United Arab Emirates (UAE) – The UAE is India’s second largest export destination and import source, with trade surging over April-October 2021-22. The two countries are in advanced stages of concluding discussions for a comprehensive economic partnership agreement, which could be finalised in the early months of 2022.

Israel – India and Israel agreed to restart FTA discussions in October 2021 which were first held in 2010 but could not be concluded then. The new agreement has been slated to be concluded by June 2022. Bilateral trade stands at around $5 billion.

Australia – The two countries have made good progress on the comprehensive economic cooperation agreement which would include trade in goods and services as well as investments. An interim agreement is likely to be inked ahead of the final deal for which the target date is end of 2022.

United Kingdom (UK) – The India – UK Enhanced Trade Partnership may also see an interim deal in the first quarter of 2022. The formal negotiations are expected to be launched within weeks, with the final agreement to be concluded at the end of 2022.

EU – India’s trade negotiations with the EU were last held in 2013 without an outcome. The two sides agreed to resume talks in May 2021. A comprehensive agreement is proposed and would likely take until mid-2023 to be finalized.

Canada, Gulf Cooperation Council (GCC) and the Eurasian Economic Union (EAEU) are other countries / regions with which India is in discussions to initiate negotiations to formulate beneficial trade arrangements.

Upcoming FTAs are expected to be broader in scope and deeper in trade integration. To have a beneficial impact, tariffs on about 90% of traded goods need to be reduced in an FTA and such significant liberalization would help both sides gain market access.

Another way that these new FTAs are likely to be different is that they would include goods, services and investment.

Further, given the increased presence of non-trade related chapters in recent FTAs between other countries and regions, India’s discussions could centre around issues such as Intellectual Property Rights, government procurement, labour and social issues and environmental factors. The digital economy too could be a core chapter in the new agreements. It is clear that India’s trade strategy is on a fast-track, opening up many new markets and creating new opportunities for Indian businesses on the global stage as well as overseas companies in India.