The ASEAN-India FTA (AIFTA) was operationalized in 2010 with the hope of expanding and diversifying Indian trade, both in goods and services by leveraging cost and other advantages for both the trade partners.

After 15 years, it is time to review the achievements, prospects and the way forward. AIFTA has indeed led to a widening trade deficit, primarily due to imbalanced duty preferences, market access disparities, and structural advantages enjoyed by ASEAN countries within the agreement’s framework, among many other factors. In view of the planned review of AIFTA, let us understand the issues, challenges and way forward.

Misguided assumptions

One of the most significant factors in AIFTA was that India offered a higher level of duty preference to ASEAN countries than it received. Historically, India’s import duties were higher than those of ASEAN nations, meaning that the FTA concessions granted substantial market access to ASEAN exporters.

Furthermore, India agreed to a more accelerated timeline for eliminating tariffs, creating immediate opportunities for ASEAN firms to expand into Indian markets without reciprocal benefits for Indian companies. Another critical issue is the compartmentalized approach adopted by India when phasing out tariffs for different ASEAN countries.

While the agreement set an ambitious timeline for reducing tariffs, it offered an even more generous time window to the CLMV (Cambodia, Laos, Myanmar, Vietnam).

This differentiation in tariff elimination timelines allowed CLMV countries, especially Vietnam, to capitalize on a more extended period of preferential access, enhancing their competitive edge in the Indian market. Vietnam’s centrality in China+1 coupled with operationalization of RCEP led to overwhelming gains as it became a net exporter to India, contributing to a trade deficit along with other ASEAN countries.

We overlooked the fact that ASEAN countries have a longstanding history of economic cooperation with a robust manufacturing network, deeply integrated across member countries. ASEAN nations leveraged their economies of scale, scope and systems, creating a manufacturing ecosystem with regional value chain synergies that allowed them to export competitively.

India also remained disadvantaged in important sectors. For instance, in the case of the two-wheeler industry, Indian manufacturers faced barriers to fair market access in ASEAN countries and were compelled to invest in ASEAN-based manufacturing plants to compete against dominant players from Japan and China, who had better-established regional networks.

The absence of reciprocal market access across high-potential sectors limited India’s export growth while opening the door to substantial ASEAN imports.

RCEP to Rules of Origin

The RCEP has further integrated ASEAN with China, strengthening the manufacturing and investment ties between these economies. With China’s extensive investment in ASEAN’s manufacturing sector, the region is becoming increasingly competitive.

Due to India-China border tensions, several electronics and machinery companies have redirected investments to ASEAN, allowing ASEAN countries to leverage benefits of both RCEP for sourcing and AIFTA for exporting — complying with rather lenient rules of origin (ROO).

The import data for categories such as electrical machinery, optical and medical instruments, iron and steel, and plastics illustrate this trend, with rising imports reflecting India’s growing dependence on ASEAN for these products. In the entire bargain, the FTA has inadvertently facilitated circumvention practices that have harmed India’s domestic industries. For instance, India, once a net exporter of iron and steel, became a net importer, partly due to the routing of cheaper Chinese steel through ASEAN countries.

By leveraging AIFTA-ROO, Chinese steel could enter India under the guise of ASEAN-origin products. This practice not only eroded the competitiveness of Indian steel manufacturers but also exacerbated India’s trade deficit with ASEAN.

Gold imports provide yet another classic case of FTA exploitation. ASEAN countries import raw gold, convert it into manufactured gift items, and then export these to India, enjoying preferential tariffs.

Once imported, these gold items are often repurposed into jewellery in India. Importers exploitFTA rules to circumvent duties that would otherwise apply if the products were sourced directly from non-ASEAN countries.

The Way Forward

We must plan two ways, first and foremost on planned negotiations leveraging the game theory approach to address disparities in future negotiations. For instance, the Nash Equilibrium under game theory suggests seeking a stable arrangement where neither party gains by altering terms in the garb of non-tariff barriers and ROO circumvention. However ASEAN’s sectoral advantages in electronics and metallurgy may still challenge Indian industries. To avoid the Prisoner’s Dilemma, India should counter ASEAN’s selective support in sectors like electronics, which deepens trade imbalances, by advocating for fairer terms. India must prioritize securing better market access for its own industries, particularly in pharmaceuticals, automobiles, IT, textiles, and food products, to enhance competitiveness and reduce trade disparities with ASEAN.

Most importantly, India’s policymakers must revisit the investment climate to promote ‘Make-in-India’. We must scale our capacities in critical sectors such as base metals, defence, electronics and electricals, and emerging technologies.

A friendly investment regime, whether as tax free financial centres or as SEZs can play an important role as investors always prefer to remain away from the clutches of regulatory red tape.

Lastly, revisiting the FTA terms through stricter rules of origin and reciprocal market access could support Indian industries by preventing circumvention, such as routing non-ASEAN goods through ASEAN nations to avoid tariffs. With these recalibrations, India can protect key sectors, address the deficit, and foster a balanced, mutually beneficial trade relationship with ASEAN.

The writer is Professor & Head, IIFT New Delhi. Views are personal