India's FTAs: A New Era of Trade Policy Focused on Market Share Gains
India has recently concluded major free trade agreements (FTAs) with the European Union, the United Kingdom, and Australia, marking a significant shift from a more inward-looking trade policy. These agreements collectively provide Indian exporters with zero-duty access to a massive $3.5 trillion market, particularly in low-skill manufacturing sectors such as apparel, footwear, and assembled electronics. The EU and UK alone account for approximately 30 percent of global imports in these products, creating a robust platform for potential export growth. However, the true measure of success for these FTAs will not be the signing ceremonies but the tangible gains in global market share that India achieves.
Closing the Competitive Gap and Attracting Global Investment
For years, Indian exporters faced a competitive disadvantage, with tariffs of 10-12 percent on apparel and up to 17 percent on footwear in key markets, while competitors like Bangladesh and Vietnam enjoyed preferential access through their own FTAs. This gap has now been eliminated, a move for which the government deserves credit. Beyond tariff reductions, these agreements signal policy stability, making long-term investment decisions more viable for global companies seeking alternatives to China. This opens up opportunities for manufacturing in India to serve European markets, revitalizing strategies like China-plus-one and Vietnam-plus-one.
Measuring the Export Opportunity and Challenges Ahead
India's export potential is substantial, with estimates suggesting it exports about 18 percentage points less than its capability in low-skill manufacturing, equivalent to roughly $160 billion in annual headroom. To convert FTAs into sustained gains, action is required on four critical fronts outside the agreement texts.
Key Challenges in FTA Implementation
- Standards Compliance: Non-tariff measures, such as product-safety and environmental requirements, now affect 90 percent of world trade, up from 15 percent in the late 1990s. Compliance costs are high, and non-compliance by even one exporter can damage an entire industry's reputation. India has faced issues in sectors like pharmaceuticals and agriculture, where individual failures led to market bans. Industry associations must enhance self-regulation, supported by government testing infrastructure.
- Regulatory Simplicity: India's trade regime remains overly complex, with tariffs featuring more than 140 unique rates and many specific conditions. This complexity raises compliance costs and invites disputes, as seen in cases like Volkswagen's $1.4 billion tariff issue. Simplifying tariffs, as learned from GST reforms, is crucial for export competitiveness and credibility.
- Access to Competitive Inputs: FTAs open export markets but do not guarantee access to the best inputs and machinery. Many capital goods in agreements like the UK FTA have long phase-outs to zero duty, and some equipment comes from countries without FTAs. High tariffs on inputs can raise costs and weaken export potential, necessitating low, uniform tariffs across the board.
- Sustained Commitments: India has a history of undermining trade agreements post-signing through measures like anti-dumping duties and quality-control orders, which protect upstream producers but harm downstream exporters. Erratic regulations weaken credibility, and commitments must be sustained to build trust with global partners.
Domestic Reforms and Future Outlook
Positive steps include simplifying labour codes, rationalising GST rates, and setting up a deregulation commission. However, high input costs in areas like power and credit remain a constraint. As the Economic Survey notes, competitiveness must be achievable and affordable for export discipline to work. The government's handling of negotiations, such as with the US through back channels, shows promise. Ultimately, the success of India's FTAs hinges on credibility built through standards compliance, simpler regulation, access to competitive inputs, and unwavering commitments after agreements are signed.
