Why Indian FTAs are shifting direction to the West

India has so far signed 13 FTAs¹, which include the FTAs with Japan, Korea and ASEAN. Agreements with Mauritius, the UAE and Australia have been concluded recently. To examine the impact of FTAs and their changing architecture, and evaluate the benefits, EY brought together domain leaders and policymakers in a virtual roundtable. The panel was moderated by Uday Pimprikar, National Indirect Tax Leader, EY, and the panelists included Ajay Srivastava, former Additional Director General (Foreign Trade); Bipin Menon, Development Commissioner, Noida SEZ; and Agneshwar Sen, Associate Partner, Tax and Economic Policy Group, EY. 

The panelists noted that there has been a shift in the architecture of the earlier FTAs with Japan, Korea and ASEAN and the recent FTAs with the UAE, Australia and the one under negotiation with the UK. The UAE and Australian FTAs have created specific opportunities for Indian companies. There are higher expectations from the ongoing negotiations with the UK, the EU and Canada. 

The earlier FTAs have been a mixed bag for India. While the outcome with Japan, Korea and ASEAN was balanced overall, with ASEAN, India did not gain much in exports though imports increased. India’s global imports during the 2010-21 period rose by 63%, but imports from ASEAN alone grew about 120%. Exports did not see a similar level of increase mostly due to the fact that countries such as Singapore and Malaysia do not have duty on many products. Therefore, Indian exports where duties are zero did not gain from the FTA route. India’s exports to South Korea increased to double of the global exports after the FTA was signed. However, due to lack of post-FTA outreach initiatives regarding new market opportunities, among other reasons, the benefits did not scale up.

Based on past learnings and changing dynamics of global trade, India’s FTA architecture has changed. While the earlier FTAs focused on eastern countries under the ‘Look East’ policy, the recent FTAs are more focused on Western geographies such as the US, the UK, the EU, and Eurasia. The bulwark of this shift is India’s need to look for supply chain partners that are credible and resilient, while offering investment and access to technology. Given the strong political will and diplomatic ties with these regions, such a change may be win-win. 

Another difference is that traditionally, FTAs focused on goods trade and related measures. The new FTAs, however, seek deeper economic integration, reflecting the changing paradigm of international trade agreements. India, through the new agreements, is expressing its understanding of these changes and adopting the imperatives that drive the modern economic trade order. 

While the FTAs with Australia and the UAE are a mix of traditional and modern elements, the agreements with the UK and the EU have more modern elements. The agreement with Australia has a two-tier structure in terms of tariff concessions and robust rules of origin, observed the panelists. The UK FTA not only negotiates on tariffs or domestic barriers and services but also talks about sustainability, labor, supply chain resilience, and digital trends like unhindered data flow. The agreements with the UK and the EU will have more than 20 policy areas².

Specific opportunities for India: India’s FTAs with various countries offer distinct trade opportunities.

• The existing agreements with the UAE, for example, will boost sectors such as gems and jewelry, plastics, engineering goods, textiles and agro-processed foods. There is also huge potential for financial, audio-visual and entertainment services.
• The FTA with Australia is beneficial for various sectors including textiles and engineering. Australia could also become a center for exports to East Asian countries where India does not have market access.
• Similarly, the UAE could become an important intra-port destination where warehousing value-add can be done for exports to Africa and Europe. 

The ongoing negotiations with the UK are expected to lead to a comprehensive agreement and would include products such as automobiles and whiskey. In the services sector, financial services will require multiple negotiations. The agreement with the EU may be complicated as it involves 27 countries. The new FTAs can also help start-ups looking for opportunities abroad. 

Factors critical for creating India-centric value chains 

In the recent FTAs, based on learnings from past agreements, India is increasing its focus on goods and services of specific export interest. Products like electronics, computers and laptops are already included in value chains. The new agreements will, however, also include a variety of finished products, not necessarily hi-tech, like shirts, shoes and bicycles. India is the largest exporter of cotton yarn, which is woven into fabric largely in China, dyed in Spain or Lesotho, and then sent to Ethiopia, Bangladesh or Vietnam, from where the final apparel is distributed around the world. Therefore, the value chain for a smaller product such as a shirt is like that of complex electronic products. Similarly, bicycles, pedals and brakes come from Japan, saddles from Italy, and frames and wheels from China. This means assembly can be anywhere in the world. India must identify the products, understand the value chain and take proactive steps to export the final value-added product on that chain.

Action points 

To have a bigger role for exports, India must improve efficiency of ports, shipping, customs etc. via automation. Improved efficiency, along with low or nil duties, can also be a big boost for participation by Micro, Small, and Medium Enterprises (MSMEs). The existing value chains are being disrupted as many organizations and countries feel the need to develop alternate sources of supply in which all the components are available in the domestic vicinity or within the country’s own economy. Therefore, India has to look at a hybrid model to source from the most efficient suppliers, including domestic suppliers. There is a need to build capacities across the value chain.

In developed economies, cutting-edge technology and products are changing the nature of products. So, FTAs may be a good way for India to build bridges to reach out to those markets.