Why FTA gains elude India

Expectedly, about two-thirds of India’s total trade was conducted with its FTA partners in 2025-26 and almost 71% of its exports and 57% of its imports were accounted for by these countries. In the recent past, overall exports were driven by the two largest markets — the US and European Union (EU) — although during the previous fiscal year, exports to the US remained almost stagnant while India’s presence in the EU declined for the second consecutive year.

India’s overall record of implementing FTAs is not very impressive. From the end of the previous decade, trade with its FTA partners has not reflected the increased opportunities that Indian businesses have been offered through preferential access to their markets. In the post-Covid years, India’s overall exports increased by a compounded rate of 1.2%, while overall imports increased by 6%.

On the other hand, the increase in India’s exports to its FTA partners was identical, while its imports were slightly higher. While growth in exports remained sluggish, imports have registered a consistent increase, given the sizeable market access that India gave to its partner countries in all the recent FTAs. Consequently, India faces the spectre of a rising merchandise trade deficit, which has now begun to hurt the economy.

A closer look at the trends of implementing FTAs with major partners — including the Association of South East Asian Nations members, Republic of Korea, and Japan, which are being implemented for nearly a decade and a half — provide some answers why the country has not realised the expected benefits from these agreements.

The problem seems to be the inability of Indian businesses to consistently serve these markets. Until 2022-23, India’s exports to all the three FTA partners increased steadily, but in subsequent years the rising trends reversed sharply, especially with Korea (by over 25%). The FTA with the European Free Trade Association raised considerable expectations of increased market access for Indian businesses due to the lowering of tariffs by the four-member bloc, but exports to these countries stagnated at less than $2 billion.

FTAs have not delivered the desired results through higher export earnings due to two sets of incapacities of Indian producers — in manufacturing and agriculture. First, policy measures taken to improve competitiveness have not delivered adequately. Second, Indian producers do not seem to have fully realised that market access in goods trade are no longer determined by tariffs; the non-tariff measures (NTMs), comprising product and process standards, hold the keys to gaining market access.

The National Democratic Alliance government launched the Make in India initiative to transform India into a global manufacturing hub and increase the share of manufacturing in GDP from 16% to 25% by 2020. Six years later, the the production-linked incentive scheme was launched, targeting 14 strategically important industries. The two initiatives were expected to improve competitiveness of critical manufacturing sectors, leading to increased exports. However, questions are being asked about these schemes as the share of manufacturing dropped to below 15% in 2025-26.

Moreover, improvements in research and development intensity, considered a sine qua non for improving competitiveness, were not seen since 2010. Therefore, in order to improve manufacturing competitiveness, the government needs to urgently focus on pulling manufacturing industries by their bootstraps to make them globally competitive in a time-bound manner. At the same time, public-private partnerships must be forged to substantially step up investments in science and technology institutions, without which the technological gap with India’s competitors can never be bridged.

For decades, India’s agriculture has been steeped in crisis, but few meaningful efforts have been taken to change the dynamics of this sector. Even a comprehensive agricultural policy that could improve sectoral competitiveness and ensure that products meet global food safety standards was never developed in nearly eight decades since Independence. Though the government has often spoken about making India an agricultural export hub, the lack of efforts at improving competitiveness and product quality would leave this objective unrealised.

NTMs are formally included in all FTAs that India has signed with advanced countries in recent years. The more important NTMs include sanitary and phytosanitary measures, technical barriers to trade, environmental standards, and international labour standards. Compliance with these complex regulatory standards is imperative for Indian businesses to realise the expected gains from these FTAs. While endorsing the FTA with India, the EU underlined that product/process standards for protecting “human, animal, and plant health are non-negotiable”, and that all products imported from India under the agreement would have to respect these standards with no exception.

Environmental and labour standards have increasingly been used as a leverage to regulate market access in advanced countries. In their respective FTAs, the EU and the UK have included the Carbon Border Adjustment Mechanism (CBAM), a carbon tax imposed at the border on imports covering five sectors — iron and steel, cement, aluminium, fertilisers, electricity, and hydrogen. The CBAM has an extensive set of procedures that raise the cost of exporting to the EU and the UK. Therefore, Indian businesses need to be fully prepared to ensure that the CBAM’s high compliance costs do not erode their competitiveness.

Thus, for India to benefit from the newly-minted FTAs, adequate investments must be made for upgrading production facilities as well as regulatory institutions in the country.

Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.