Context

As per a recent update, talks for free trade agreements (FTAs) are going on with Australia, UAE, GCC (Gulf Cooperation Council), European Union, Israel, and the UK.

Background

• The Indian economy has been witnessing a bounce back in every sphere, and the country is well on track to achieve historical highs in goods and services exports.
• India is on course to achieve $400 billion of merchandise exports in the current financial year ending March.
• If at this stage, FTAs get finalized with major countries, India would be in a favorable position.

Analysis

What is Free Trade Agreement (FTA)?

• An FTA obligates signatory countries — bilaterally or multilaterally — to a set of ‘mutually agreed conditions’ about trade in goods and services among them.
• Terms can include
  • tariff levels
  • removal of measures and provisions that act as trade barriers
• Under a free trade agreement, two trading partners reduce or eliminate customs duties on the maximum number of goods traded between them.
• Significance of FTAs
  • FTAs are an important tool to enhance trade and investment.
  • Strategically, FTAs have helped India compete at a global level and enhance its growth. 
  • They liberalize norms to enhance trade in services and boost investments.

What is India’s engagement in FTAs?

• India currently has FTAs with five countries bilaterally and 18 countries multilaterally — 11 member-countries of the Association of Southeast Asian Nations (ASEAN) and seven of the South Asia Free Trade Agreement.
• Four more are under discussion; these include bilateral deals with Australia, the United Kingdom, and the United Arab Emirates and a multilateral arrangement with the European Union, which has 27 members.

Major FTAs India-ASEAN Trade in Goods South Asia Free Trade Agreement (SAFTA) Indo Malaysia CECA (IMCECA) India Singapore CECA (ISCECA) Japan India CEPA (JICECA)

FTA between India and US

• The US has 14 trade agreements with 20 countries, including a bilateral trade agreement with China.
• India and the United States have plenty of trade issues that can, theoretically, be resolved by an FTA.
• Even if Indian and the US were to agree today, an FTA will still take years to be signed and then some more years — perhaps even 10 to 15 — to be operationalized.

What is India’s approach towards FTAs?

• Reciprocal and equitable access to markets: India is looking at reciprocal and equitable access to foreign markets through free trade agreements, which the country is negotiating with its trading partners.
• Balanced opportunity for all sectors: A few old FTAs of India which were not balanced have led to an increase in trade deficit with those nations. Therefore, India is now going through careful stakeholder engagement (to negotiate an FTA) and making sure that
  • MSMEs, the dairy industry, farmers, and domestic production capacities get more opportunities.
  • Employment-oriented sectors like textiles, footwear, and pharma get good market access.
  • Services sector professionals to get good opportunities in the foreign markets through two way communication with Indian stakeholders

Challenges

• Less focused arenas: Despite having strong pharma, IT, ITeS, and education sectors, the agriculture and industrial sectors, especially MSMEs (micro, small and medium enterprises), are still fragile when compared to those in countries with which India is negotiating FTAs.
• Continuous changes in the global economy: Though India’s approach towards expanding existing FTAs is on the right track, the country is currently faced with the challenge of rebalancing its trade strategies because of some significant changes occurring in the global economic environment.
• Smaller foreign markets: However, since some market sizes are smaller, the impact of various FTAs shows that India has underperformed, with imports always being more than exports.
• Impact of domestic manufacturers: In certain cases, domestic manufacturers were the worst affected as FTA made imports cheaper. 
• Other issues are:
  • Complex rules of origin
  • lack of information on FTAs
  • higher compliance costs
  • administrative delays

What measures are required?

• Trade enhancement plus protection of domestic sector: The government has to focus on two areas when negotiating on FTAs — enhancing trade and protecting the domestic sector.
• Minimizing compliance cost: The focus should also be on minimizing the compliance costs involved in getting benefits under FTAs. India needs to eliminate or reduce the hurdles exporters face and ensure that FTAs focus on ease of doing business and expanding trade opportunities for exporters.
• Careful dealing: As the results of existing FTAs are not that noteworthy, India should be careful while negotiating the clauses.

The road ahead

Currently, India’s economic conversation with the world needs a reboot and it can be brought by shifting its approach to bear in some of its crucial FTAs negotiations.

It is now likely that India would work through balanced, fair, and equitable FTAs so that both sides benefit and jobs are created in India, and business opportunities are available for our small, medium, and micro-industry.