Context:

• With the India–Oman Free Trade Agreement (FTA) coming into force on June 1, India now has 15 FTAs covering 27 countries, while nine more agreements involving 42 countries are nearing completion.
• Once finalized, FTA partner countries could account for nearly 75% of India’s exports.
• However, the rapid expansion of FTAs has highlighted four major concerns: rising trade deficits, low utilisation of FTA benefits, worsening inverted duty structures, and the relocation of manufacturing to FTA partner countries.

Rising Trade Deficits with Major FTA Partners:

• Key trends:
  • Between 2007-09 and 2024-25, the trade deficit with ASEAN increased by 381%, with Japan it increased by 318%, and with South Korea it increased by 268%.
  • In contrast, India’s trade deficit with the rest of the world rose by 142%.
  • Over the last three years, the average annual trade deficit with ASEAN, Japan and South Korea reached around $62 billion.
  • Under newer FTAs (UAE, Australia, Mauritius and EFTA countries), India exported $48.6 billion in FY2025 but imported nearly $100 billion, creating a deficit exceeding $50 billion.
• Exception: South Asia remains an outlier, where India’s trade surplus expanded from $6.7 billion to $20 billion.
• Structural reason:
  • Most FTA partners already maintain low Most Favoured Nation (MFN) tariffs, whereas India’s trade-weighted MFN tariff remains around 12.6%.
  • Consequently, tariff reductions provide substantial benefits to foreign exporters entering India. Indian exporters gain limited additional market access because partner-country tariffs were already low or zero.

Low Utilisation of FTA Benefits by Indian Exporters:

• Despite numerous FTAs, Indian exporters make limited use of preferential market access.
• Reasons for low utilisation:
  • Many partner countries already offer near-zero MFN tariffs.
  • Potential tariff savings are often too small to justify compliance costs related to rules of origin (RoO), certification procedures, documentation and paperwork.
• Outcome:
  • Only 20–30% of eligible Indian exports utilise FTA preferences.
  • In contrast, import-side utilisation rates are estimated at 60–70% because tariff reductions in India generate significant cost advantages for foreign suppliers.
• Core issue: Both rising imports and low export utilisation stem from the same factor: tariff asymmetry between India and its FTA partners.

Worsening Inverted Duty Structure:

• Meaning: An inverted duty structure occurs when import duties on raw materials and intermediate goods are higher than duties on finished products.
• Impact of FTAs: Many finished goods from ASEAN, Japan, South Korea, UAE and Australia enter India at low or zero duty, while domestic manufacturers continue to pay duties on imported inputs.
• Sectoral examples:
  • Engineering and machinery:
    • Steel and aluminium attract MFN duties of 7.5–10%. Machinery and engineering products made from these materials often enter duty-free under FTAs.
    • Domestic manufacturers face higher production costs than foreign competitors.
  • Chemicals, plastics and textiles: Inputs such as caustic soda, soda ash, polypropylene, PVC, and styrene-butadiene rubber (SBR), attract import duties. Finished products can often be imported at lower tariffs.
• Consequences: Reduced competitiveness of downstream industries, lower domestic value addition, and challenges to the objectives of Make in India and manufacturing-led growth.

“Make in ASEAN, Sell in India” Phenomenon:

• A growing concern is the relocation of production to FTA partner countries.
• How it happens: Inputs imported into India remain costly due to tariffs. Finished goods manufactured in FTA partner countries can be exported to India duty-free. Firms therefore find offshore production more profitable.
• Emerging trends:
  • ASEAN economies such as Vietnam, Thailand and Indonesia are increasingly serving as manufacturing hubs for the Indian market.
  • Chinese firms have invested heavily in these countries.
  • Several Indian companies have also established factories and joint ventures there.
• Affected sectors: Electronics, steel, chemicals, plastics, consumer goods, and engineering products.
• Implications: Movement of investment and jobs outside India. Weakening of domestic manufacturing ecosystems. Erosion of supply-chain resilience and industrial capacity.

Way Forward:

• To ensure FTAs support industrial development rather than undermine it, India must:
  • Align tariffs on industrial inputs with FTA commitments.
  • Rationalise inverted duty structures.
  • Improve FTA utilisation through simpler compliance procedures.
  • Strengthen domestic manufacturing competitiveness.
  • Conduct regular impact assessments of FTAs on trade, employment and industrial growth.
  • Integrate trade policy with the goals of Make in India, Atmanirbhar Bharat, and global value chain participation.

Conclusion:

• India’s FTAs are expanding its global economic integration and export opportunities, but persistent trade deficits, low export utilisation, inverted tariff structures, and offshore manufacturing incentives pose significant challenges.
• Addressing these structural issues is essential to ensure that FTAs become instruments of industrial strengthening, employment generation, and sustainable economic growth rather than drivers of import dependence and deindustrialisation.