Decoding India’s revived Free Trade Agreement rush

After a decade of eschewing free trade deals, India has embarked on an FTA-signing spree that is quickly transforming the country into one of the most FTA-engaged countries in the world.

The reinvigorated FTA rush began with an agreement with Mauritius on 1 April 2021, followed by fast-track negotiations with the United Arab Emirates (UAE), Australia, the United Kingdom (UK), Canada and the European Union (EU).

On 18 February 2022, a comprehensive economic partnership agreement (CEPA) with the UAE was concluded within 90 days of commencement of negotiations and has been in force since 1 May 2022. In addition, an Economic Cooperation and Trade Agreement (ECTA) with Australia also concluded on 2 April 2022.

The next highly-anticipated FTA in the works is with the UK, which is expected to conclude by Diwali (the festival of lights) in October 2022. FTA discussions are also on the fast track with Canada, the EU, as well as with the Gulf Cooperation Council (GCC – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE) and Israel.

A full circle

India’s engagement in FTAs has come full circle. At the turn of the century, the country negotiated several FTAs, which included deals with Singapore, Malaysia, Japan, Korea, and the ASEAN (Association of Southeast Asian nations). These FTAs were greatly encouraged by the Look East Policy (LEP) and undoubtedly expanded India’s trade and investment links with Southeast and East Asia. However, it also spurred concerns among Indian industry and policy authorities when imports accelerated substantially more than exports.

Protectionist fears have made India heavily sceptical of FTAs over the last decade, during which negotiations with the EU, Australia, and Canada were on hold. But perhaps the greatest example of protective interests blocking India’s engagement in FTAs was the withdrawal from the Regional Comprehensive Economic Partnership (RCEP) - an agreement comprising the ASEAN economies, Australia, Japan, Korea, China, New Zealand and India - in November 2019.

India’s vigorous re-engagement in FTAs less than two years after withdrawing from the RCEP - a remarkable turnaround induced by economic and political imperatives - marks a full circle in the country’s FTA journey.

Understanding the U-turn

Safeguarding supply chains and diversifying sources have been major factors behind India’s FTA drive. As in many other countries, COVID19-induced supply chain disruptions alerted India about the necessity of diversifying its sources of essential products (e.g., electronic chips, chemicals, bulk drugs, and edible oils). This glaring imperative effectuated the sourcing of product supplies and natural resources by connecting to multiple large economies through formal trade agreements.

For India, FTAs are also essential for enhancing exports, and the country has subsequently set an ambitious annual goods export target of $400 billion. The target was successfully reached in FY21 (April 2021-March 2022), after which Prime Minister Modi took to Twitter to congratulate local farmers, exporters, manufacturers, and MSMEs on this milestone. Achieving the target annually, however, would require preferential access to Indian exports in major markets through FTAs.

Moreover, COVID19 led to major geo-political upheavals, particularly around the US-China conflicts, causing the global order to become further multipolar and organized among country alliances. While India is already an active member in new alliances such as the Quad and the Indo-Pacific regional architecture, strategic imperatives have also brought it closer to the G7 on common concerns, such as resilience of supply chains, clean energy, and healthcare.

India recognizes and accepts the inevitability of complementing political cooperation with strategic partners with economic engagement – an understanding which has heavily influenced the FTA drive. Subsequently, the country is negotiating its latest FTAs with its major strategic partners, in line with Commerce Minister Piyush Goyal's assertion that India considers FTAs with 'like-minded nations with values of democracy, transparency and mutual growth’.

FTAs with 'like-minded' economies, including G7 members, will enable India to diversify sourcing, increase exports and align to new standards and regulations in global finance, clean energy, digital trade, and supply chains. These new agreements will secure ‘win-win’ outcomes for India, both politically and economically, of which the upcoming FTA between India and the UK is a typical example.

The India-UK FTA

The UK FTA would be India’s first with a Western G7 economy. Five negotiation rounds have already taken place, with discussions centred on detailed draft treaty texts and the urgency to meet the Diwali deadline visible on both sides.

As illustrated in their Roadmap 2030 for bilateral relations, the two countries are strategically converging on shared interests and looking at the FTA as an integral part of a composite strategic alliance. Along with people-to-people connectivity, health, climate and defence, trade and investment are key elements of the partnership.

The rapid progress on the India-UK FTA demonstrates the efforts invested in its shaping by the national leaderships of both countries. In addition to marking the maturing of the bilateral enhanced trade partnership (ETP), the agreement will focus on removing market access barriers to facilitate a greater flow of goods, services, capital, technology, and people between the two countries.

UK exporters of beverages, wines, spirits, fruits (e.g., apple, pear) and automobiles can expect deeper access to the Indian market. In turn, India requires easier access to textiles and garments, students, skilled workers, and specialists (e.g., legal, and medical professionals, IT workers and financial experts) in the UK market.

A unified challenge

The extent to which expectations materialize will depend on both countries' ability to remove politically sensitive market access barriers. For India, this implies slashing tariffs on currently highly protected sectors like wines and automobiles. For the UK, the challenge is to enable easy entry rules for students and professionals.

Furthermore, the common challenge is to get national regulatory agencies to agree on mutual product standards and technical qualifications. Without such agreements, the FTA will not realize the potential of a mutually beneficial strategic economic partnership.

"As India re-engages with strategic partners through free trade agreements, a clearer picture forms of what it wants from the trading system, beyond access for its strong services sector," said Sean Doherty, the World Economic Forum's head of international trade and investment.

Notwithstanding the challenges, India’s fresh appetite for FTAs, sparked by strategic and economic necessities, and matched by purposeful efforts from the UK, should pave the way for a comprehensive FTA.

Apart from generating great economic opportunities for both countries, the FTA can also become an accepted template for future FTAs between large emerging markets like India and developed Western industrial nations like the UK.

Source: World Economic Forum