Negotiating a good trade deal with developed economies, though a challenging task, is only the first step. Kudos to our trade negotiating team led by Hon’ble Commerce & Industry Minister Shri Piyush Goyal, for delivering these important FTAs in a short span of time. While India’s FTA journey started with East almost two decades back in 2003, the focus towards west shifted after India’s withdrawal from RCEP in 2019. This has enthused a large section of Indian exporters who have for decades enjoyed preferential access to Western markets through GSP.
FTA1.0
India’s FTA journey is two-and-a-half decade old and can be divided into three distinct phases. FTA1.0 focused upon East Asia and ASEAN nations covering a period between 2003 to 2012, followed by a period between 2012 and 2019, during which India was completely engrossed in RCEP negotiation. After seven years of intense negotiation, India finally announced its withdrawal from RCEP in 2019. The decision surprised many but Indian industry gave big thumbs up to the Indian government.
FTA2.0
India’s withdrawal from RCEP was a turning point in its FTA strategy – till then largely focused upon the East. It brought an important shift in its trade negotiation strategy that included – country selection based on industry needs, ensuring timely conclusion, open to negotiate new issues to satisfy demands of partner countries and most importantly instituted a close consultation mechanism with industry. This laid the foundation of FTA 2.0 with renewed vigour.
FTA with Countries of Industry’s Choice
As per the wishes of Indian industry, the government prioritized FTA negotiation with those countries which have been India’s traditional export market – UK, EU, EFTA, Canada, Australia, New Zealand and USA. Except Canada, India has signed/operationalised trade deals with all of them. Besides these countries, India also inked FTA with UAE and Oman and all set to launch trade talks with the GCC countries. Undoubtedly, India made some important course corrections in its FTA strategy, which helped in faster conclusion of negotiation, but the major challenge remains – leveraging FTA for export growth.
FTA Utilization Remains a Challenge
India so far doesn’t have a very good record of FTA utilization. Unlike developed countries who have a very high utilization rate of 70-80%, and 40-50% by some of the emerging economies like Vietnam, South Korea, Mexico and Chile, India’s score is much lower at 25%. If one tries to link India’s FTA with export growth, the result is not very attractive. India operationalised four major trade agreements – ASEAN, Korea, Japan, and Malaysia – between 2010 and 2012. Post implementation of these FTAs, India faced a long period of slump in merchandise exports.
Now we are once again facing the similar situation as within a span 2-3 years several FTAs would come into force. In 2022, India already operationalised its FTAs with UAE and Australia, EFTA came into force in 2025, and UK, EU and USA are expected to come into force very soon. For Indian industry, the task is cutout. The government has delivered trade deals which industry wanted – with traditional markets in the West and not with the competing ones from the developing world.
Move Beyond Traditional Sectors
Given our ambitious aim to achieve export of US$1trillion each for goods and services by 2030, FTAs with developed markets have come at the most opportune time. However, merely relying on traditional labor-intensive products such as textiles & apparel, leather, gems & jewellery etc may not be adequate in giving the kind of disruptive growth required to cross the finishing line of total exports of US$2trillion by 2030. To achieve the merchandise export target alone by 2030, the required annual growth would be 23%.
Three-Pronged Strategy
India needs to work on three fronts immediately. First, scale and technology upgradation in traditional export sectors to leverage these FTAs for significant market gains. This message has been given by Hon’ble Commerce Minister Shri Piyush Goyal during one of his recent interactions with Export Promotion Councils. For instance, the size of the EU and USA market for textile & apparel sector alone is valued at over US$450bn, in which India holds a modest share of 8-9% currently. Similarly, for leather & leather products, the EU’s import is massive at US$100bn approximately. India’s share is only 2-3%.
Secondly, to access these developed markets, besides volume, Indian exporters also need to focus on addressing quality & regulatory barriers. The EU is well known for periodically introducing new product and sustainability standards, which act as Non-Tariff Barriers for those exporters who are unable to comply with them. While there has been significant improvement in India’s quality infrastructure over the last one decade, the gap persists vis-à-vis requirements of European and US markets. The Indian Government for the time being has put a pause button on QCO but sooner it will have to find an alternative way to enable Indian exporters to comply with quality.
The third and perhaps the most important factor is leveraging FTA to attract FDI. MNCs account for roughly two-third of world trade, out of this 33% is intra-firm cross-border trade. In this scenario, the FTA becomes a useful instrument for MNCs to ensure seamless operation of their cross-border production network. All those countries, who have successfully used FTA for exports, followed the FDI route. For instance, in the case of Vietnam the MNCs account for nearly 75% of goods exports, while this figure touched as high as 60% in China but now declined to 35% because local companies are becoming more competitive. As regards India, there is no precise figure available but presumably it is much lower.
India, however, realized the importance of making FDI a central part of FTA. It made the beginning while negotiating a trade deal with the four-nation EFTA (European Free Trade Association) block. The Trade and Economic Partnership Agreement (TEPA) with EFTA commits US$100 billion in FDI and 1 million jobs in India over 15 years. To convert this commitment into actual investment, India has set up an EFTA desk at Invest India, which acts as a single-point interface and provides end-to-end facilitation to prospective and existing EFTA investors.
The author is Chairman of Hi-Tech Gears Limited and Former Chairman of NABCB, a Constituent of Quality Council of India.