After a decade-long hiatus, India resumed signing Free Trade Agreements (FTAs) in 2021, completing four deals in three years in fast track mode with Mauritius, the UAE, Australia, and EFTA countries (Switzerland, Norway, Iceland, and Liechtenstein).
However, India’s approach to FTAs has now entered a phase of recalibration, focusing on securing better outcomes and avoiding past pitfalls. This cautious strategy has slowed negotiations with the UK, Oman, and Peru, even though talks are at advanced stages.
Key issues India needs to address include: Calls to join RCEP, a review of the UAE FTA, remaining out of the IPEF Trade Pillar and streamlining trade policies. These issues are discussed further below.
A growing narrative pushes India to reconsider joining RCEP, with institutions like the World Bank, NITI Aayog, and economists highlighting benefits such as deeper economic integration in Asia, support for MSMEs, and improved export competitiveness. However, critics warn of challenges, including a widening trade deficit and increased competition for MSMEs from cheaper imports.
India’s significant trade deficit with China rules out a bilateral FTA, but joining RCEP presents an even more significant challenge. Unlike bilateral deals, where tariff reductions can be phased in, RCEP would allow Chinese goods to enter India easily through other member countries with minimal processing from day one. The government must carefully weigh these factors before making a decision.
The India-UAE FTA, effective May 1, 2022, aimed to boost bilateral trade by eliminating tariffs on essential commodities. However, its provision for unlimited duty-free imports of gold, silver, platinum, and diamonds has led to a sharp increase in imports of these items from Dubai.
To curb the surge, the government reduced import duties on gold and silver from 15 per cent to 6 per cent in the 2024 Budget. However, this offered only partial relief, as tariffs on these items from Dubai are set to drop to zero in the coming years, likely fuelling further increases in imports. As a result, renegotiating the CEPA (Comprehensive Economic Partnership Agreement) to revoke these concessions has become the government’s only feasible option. Reducing MFN tariffs to zero was ruled out due to concerns over excessive imports and forex outflows.
The UAE does not produce gold or silver, and the FTA has incentivised suppliers to reroute shipments through Dubai to benefit from the tariff concessions — an arrangement that deviates from everyday trade practices. This has contributed to a 70.4 per cent year-on-year increase in India’s trade deficit with the UAE in October 2024.
India should rethink its strategy for including gold and silver in FTAs. Similar challenges could arise with the proposed FTA with Peru, from which India already sources 93 per cent of its gold.
No to IPEF trade pillar
With Donald Trump elected as the next US President, India may face renewed pressure to join the Trade Pillar of the Indo-Pacific Economic Framework (IPEF). While India has committed to three of the four pillars in this 14-nation initiative, it has prudently refrained from joining the trade-focused component.
The IPEF Trade Pillar advocates for the free cross-border flow of data, a key demand of American technology companies. Trump’s administration may urge India to adopt more open data-sharing policies, which could undermine the country’s digital sovereignty. For example, Elon Musk’s Starlink has sought permission to provide satellite-based internet services in India. Granting such access could result in sensitive Indian data being stored on US servers, diminish India’s control over digital content, and create a dependency on foreign providers — potentially rendering India a “digital colony” of the US.
Starlink represents a critical test case. Conceding to its requests could open the door to similar pressures in the future. Joining the IPEF Trade Pillar would further erode India’s ability to independently assess such proposals, as it would be bound by rules favouring unrestricted data flows across borders.
India has rightly opted out of the IPEF Trade Pillar, which imposes constraints on domestic policies related to digital trade and labour standards without offering reciprocal benefits like tariff reductions. Maintaining this stance is essential to safeguard India’s digital and economic interests.
India currently has 14 trade agreements with 25 countries and six smaller agreements with 26 more. The government should release a status paper assessing the performance of these FTAs, including details on trade utilising FTA benefits and sectoral gains and losses.
India also needs to invest in building a larger team of expert negotiators. Indian teams are smaller than those of other countries, with just one or two people in a subgroup. In contrast, for instance, Japan’s negotiating team for rules of origin in an FTA included 20 members. While one negotiates, others observe and learn over the years, eventually becoming a seasoned negotiator. India should adopt a similar approach to training future negotiators.
Although the government is developing internal SOPs for negotiators, these guidelines are like training manuals for fighter pilots — they provide structure and information but cannot replace the value of extensive on-the-job experience.
The government could create a common offer list for merchandise trade and adjust it for individual FTAs. This would reduce the need for separate approvals from administrative ministries for each FTA and prevent oversights, such as allowing zero-duty imports of gold, silver, and platinum under the UAE FTA. The government must build expertise in emerging non-trade areas such as sustainability, labour, and gender. Without this, India may be forced to adopt regulations from partner countries that may not align with its interests.
India’s current FTA strategy reflects a pragmatic shift towards protecting national interests while fostering global trade partnerships. The government’s cautious stance and structural reforms in trade policy and negotiation practices will be essential to achieving balanced and sustainable growth in international trade.
The writer is the founder, Global Trade Research Initiative