India has seemingly remodeled its approach to international trade in the last three years, revisiting strategies as it looks towards deeper bilateral trade agreements with its allies through Free Trade Agreements (FTAs).
India’s international trade policy
Ganeshan Wignaraja, Professorial Fellow in Economics and Trade at Gateway House, commented, “India has definitely changed its FTA approach from passive to active after its withdrawal from RCEP in 2019. Although India opened up to trade in 1991, signing multiple agreements with other countries, there was some trade skepticism leading up to 2019, with strong trade protectionism seen. There was concern about the utility of these early agreements, with domestic businesses underutilising them. Worry about a growing trade deficit was therefore an issue.”
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Following India’s withdrawal from RCEP in 2019, there was an influx of FTA endeavors, with India signing FTAs with Australia and the UAE in 2022, Mauritius in 2021, alongside ongoing negotiations with UK for a possible FTA in 2024.
“There was a worry that following the withdrawal from RCEP, India would be left behind in international trade. Trade is a quick way to create jobs, and a means of establishing India as a manufacturing hub in Asia, competing directly with China. The geopolitical tensions between the USA and China following the Trump, and now Biden administration is something India hopes to capitalise on,” added Wignaraja.
India’s international trade successes
“India loosening protection of its market will be a key driver in attracting investments in the global market. India has the potential to play an important role in the global value chain as it opens its market access significantly,” said Ajay Sahai, CEO and DG, FIEO.
The India-Australia Economic Cooperation and Trade Agreement (ECTA) came into effect December 2022, and is now looking to be expanded into a Comprehensive Economic Cooperation Agreement (CECA).
Surendar Singh, Associate Professor (International Business Area) at FORE School of Management, said, “India is at the downstream side of value chains while Australia is at the upstream. This naturally creates possible opportunities for both countries to foster bilateral value chains. Tariff reduction under India-ECTA in key sectors such as garment, engineering, and leather products will improve market access for India’s exports.
“Additionally, the India-Australia ECTA covers new areas of services trade, allowing Indians to explore work opportunities in Australia. There is also a geostrategic angle. India and Australia want to reduce their dependence on China for trade. Moreover, India, Australia, and Japan have already taken a supply chain resilience initiative to diversify their supply chains from China.”
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However, expansion from the current interim ECTA to a CECA might pose a challenge as the focus expands beyond goods and services tariff negotiations. “India’s existing foreign trade policy focuses at an aggregate level and hardly captures nuances at the firm level given divergent needs and economic goals. It is therefore important for Indian trade policymakers to recognise that trade policy moves closer to where the action is and benefits more from firm-level data and associated developments. India needs a trade policy that creates opportunities for domestic firms to plug in global trade networks. Policymakers need to identify areas of reforms that actually shape productivity and competitiveness of firms.” added Singh.
Contentious negotiations in the India-UK FTA
While India has found success in its trade negotiations with Australia, the UK poses as a larger issue. “The UK wants India to liberalise its highly protected services markets in telecommunications, finance, and legal services. But India remains apprehensive due to powerful domestic lobbies,” said Wignaraja.
Singh added, “The UK is seeking strict disciplines in core areas of the digital trade chapter which include data localisation, cross border flow of data, prohibition on using open-source code and elimination of customs duties on digital products. However, India is yet to formulate its e-commerce policy. Any commitment in these areas will have far-reaching implications for India in a data-driven global economy. India wants to protect its domestic regulatory space without undertaking any legally binding commitments. India will find it challenging to negotiate labour and environment standards suitable to them as well.”
That being said, both India and the UK will hugely benefit economically if the trade agreement pulls through. Wignaraja wrote in his blog, “Prime Ministers Narendra Modi and Rishi Sunak agreed to a reciprocal Young Professional visa scheme that will offer a place to degree-educated young Indians the right to live and work in the UK (and vice-versa) for up to two years. Indian professionals in the UK under the inter-company transfer (ICT) visa could be afforded access to long-term settlement in the UK, similar to the skilled worker visa category.”
India’s international trade in the next 10 years
With India rapidly gaining a significant role on a global forum, the future of Indian trade is optimistic. Ajay Sahai said, “India’s movement into the technology sector suggests that in the next 10 years, while the labour sector will remain an important export source of India, technology will be the real driver of exports. The next five years will be key for India in terms of manufacturing as the government rolls out Production Linked Incentive (PLI) schemes to save in imports and gain from exports by increasing domestic production.”
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Achieving this will not be easy, however, requiring active initiative by the Government. “Concerns that the PLI scheme may not account for high duties on imports may make it difficult for these sectors to source raw material. The government of India has set up an ambitious export target of 2 trillion by 2030. To achieve this, India needs to overhaul its trade and investment policy to mobilise export-oriented foreign direct investment, which is critical to enhance its participation in global value chains,” said Singh.
As India moves towards increased foreign trade and measured liberalisation, there are formidable challenges lying ahead as it continues to navigate its way around redefining its international trade policies.
(The writer is interning with businessline’s Mumbai Bureau)