Free Trade Agreements (FTAs) and India’s Trade Challenges: Opportunities & Concerns

10 Jun 2026

India has expanded its network of Free Trade Agreements (FTAs). The recently implemented India–Oman FTA has increased India’s total FTAs to 15 agreements covering 27 countries. Another 9 FTAs covering 42 countries are under discussion, which could expand India’s FTA network to 69 countries covering around 75% of India’s exports.

Meaning of Free Trade Agreement

A Free Trade Agreement is an agreement between countries where they reduce or eliminate tariffs (custom duties) on goods and services to increase trade.

UPSC Online Classes

Challenges of FTAs for India

Rising Trade Deficit: Trade Deficit: When imports from a country are higher than exports to that country.
- FTAs were expected to increase Indian exports, but in many cases imports increased faster.
- Examples:
  - India’s trade deficit with ASEAN increased significantly after the FTA.
  - The trade deficit with Japan and South Korea also increased.
  - Under the EFTA agreement, India exported around $48.6 billion but imported around $100 billion, creating a large deficit.

However, with some South Asian countries India has experienced trade surplus growth.

Issue: India has become a large market for foreign products but has not fully benefited from access to foreign markets.

Tariff Asymmetry

Meaning: Difference in tariff levels between countries; linked with MFN (Most Favoured Nation) tariff under WTO rules.
India’s MFN tariff: Around 12.6%, higher than many developed economies.
Example: India reduces tariffs from 12.6% to 0% under an FTA, while partners like Australia already have lower tariffs.
Impact: India provides a larger tariff concession and may open its market more than the partner country.

Rules of Origin (RoO) and Compliance Burden

Meaning: Rules ensuring that products receiving FTA benefits are actually produced in the partner country.
Example: Prevent Chinese goods from entering India, getting minor changes, and being exported under India’s FTA benefits.
Problem: MSMEs avoid FTAs due to complex documentation, high compliance costs, and limited benefits compared to paperwork.
Spaghetti Bowl Effect: Jagdish Bhagwati highlighted that overlapping trade rules create complexity, making firms avoid using FTA benefits.

Inverted Duty Structure

Higher import duties on raw materials and lower duties on finished goods discourage domestic manufacturing and reduce competitiveness.
For Example:
- Steel/aluminium raw material → 10% import duty.
- Finished machinery → 0% duty.

“Make in ASEAN, Sell in India”

Firms may shift production to ASEAN due to cheaper inputs and FTA benefits, exporting finished goods to India at lower tariffs.

Click to Know UPSC Offline Courses

Way Forward

Tariff Alignment: Reduce duties on raw materials to correct the inverted duty structure and promote domestic manufacturing.
Renegotiate Existing FTAs: Review agreements like the ASEAN FTA to ensure balanced trade benefits for India.
Reduce MSME Compliance Burden: Simplify Rules of Origin procedures and help small exporters access FTA benefits.
Link FTAs with PLI Scheme: Align FTAs with Production Linked Incentive schemes to promote export-oriented manufacturing.