Answer

Introduction

Free Trade Agreements aim to expand market access and competitiveness. However, India’s experience reveals that tariff asymmetries and domestic structural distortions have often translated into higher imports and constrained manufacturing growth.

Structural Challenges Causing This Trend

• Tariff Asymmetry: India’s relatively high MFN tariffs provide greater gains to foreign exporters than to Indian exporters.
  Eg: India’s trade-weighted MFN tariff is about 12.6%, whereas tariffs are below 4% in Japan, Australia, Malaysia and the UAE.
• Rising Deficits: Imports from FTA partners have expanded much faster than exports.
  Eg: India’s trade deficit with ASEAN increased by 381%, Japan by 318%, and South Korea by 268% between 2007-09 and 2024-25.
• Low Utilisation: Indian exporters underuse FTA preferences due to limited benefits and compliance burdens.
  Eg: Only about 20-30% of eligible Indian exports utilise FTA preferences because savings often do not justify certification costs.
• Compliance Burden: Rules of origin and paperwork disproportionately affect MSMEs.
• Production Relocation: FTAs incentivise firms to manufacture abroad and sell in India.
  Eg: Indian and Chinese firms have increasingly established facilities in Vietnam, Thailand and Indonesia to exploit duty-free access to India.

Inverted Duty Structure: Special Emphasis

• Cost Distortion: Input duties exceed duties on finished products, raising domestic production costs.
  Eg: Steel and aluminium attract 7.5-10% MFN duties, while machinery made from them enters duty-free under FTAs.
• Value Erosion: Downstream manufacturers lose competitiveness despite protecting upstream producers.
• Chemical Burden: Input tariffs inflate costs across industrial sectors wherein, duties on caustic soda, polypropylene and PVC raise production expenses.
• Import Bias: Finished products become relatively cheaper than domestic production.
  Eg: Many textile and rubber products enter India at low or zero duties under FTAs.
• Make Abroad: The inverted tariff structure promotes the “Make in ASEAN, Sell in India” phenomenon by incentivising offshore manufacturing. 

Corrective Measures

• Duty Rationalisation: Align input tariffs with FTA commitments to eliminate inversion.
• Periodic Reviews: Undertake evidence-based reviews of FTA outcomes and safeguard clauses.
  Eg: India reviewed the ASEAN FTA to address concerns regarding trade imbalances.
• MSME Support: Simplify rules of origin compliance and certification processes.
  Eg: The DGFT’s digital Certificate of Origin platform facilitates easier FTA utilisation by exporters.
• Domestic Integration: Strengthen local supply chains through production-linked incentives.
  Eg: The PLI Scheme seeks to enhance domestic manufacturing competitiveness across sectors.
• Strategic Negotiation: Pursue FTAs based on reciprocity and sector-specific sensitivities.

Conclusion

FTAs should complement, not compromise, India’s industrial ambitions. Correcting tariff distortions, enhancing exporter competitiveness, and negotiating strategically can transform trade agreements into catalysts for resilient domestic manufacturing and sustainable trade growth.

DOWNLOAD PDF