Context
India’s foreign trade strategy focuses heavily on bilateral and regional agreements, with 15 active Free Trade Agreements (FTAs) covering 27 nations. However, evaluation from trade bodies like the Global Trade Research Initiative (GTRI) highlights structural asymmetries that threaten local production. The core issue is an emerging “Make in ASEAN, Sell in India” paradigm, where relaxed trade barriers encourage firms to set up manufacturing hubs abroad to supply the Indian market duty-free, eroding the momentum of the Make in India initiative.
Four Critical Structural Challenges in India’s FTAs
1. The “Make in ASEAN, Sell in India” Trend
The ultimate threat to domestic manufacturing is the offshoring of production.
- Relocation of Investment: When the cost of production in an ASEAN nation plus zero-duty export to India is lower than domestic production, investment migrates out.
- Employment Drain: Manufacturing jobs move to Southeast Asia, hollowing out domestic supply chains in key sectors like electronics, steel, plastics, and engineering.
- Foreign Arbitrage: Chinese firms aggressively invest in countries like Vietnam, Thailand, and Indonesia to route goods into India, utilizing lax enforcement.
2. Worsening Inverted Duty Structure
An inverted duty structure occurs when import duties on raw materials or intermediates exceed the duties on the finished product.
- Tariff Misalignment: While final products enter India at low or zero tariff under FTAs, domestic manufacturers still pay Most Favoured Nation (MFN) duties on essential inputs sourced from non-FTA nations.
- Sectoral Stress: For instance, raw steel and aluminium face MFN duties of 7.5–10%, yet foreign industrial machinery made from these exact inputs enters India duty-free. This severely discourages domestic value addition.
3. Deepening Trade Deficits and Tariff Asymmetry
India’s trade imbalances with key FTA partners have grown disproportionately.
- Asymmetric Gains: India generally features high baseline tariffs. Reducing them gives foreign exporters massive market access, whereas partner nations (with already low tariffs) offer negligible incremental space for Indian goods.
- Widening Gaps: India’s average annual trade deficit with ASEAN, Japan, and South Korea reached roughly $62 billion. Specifically, the merchandise trade gap with ASEAN sits above $45 billion, demonstrating highly unreciprocated gains.
4. Low Utilization of Tariff Concessions
Indian exporters do not leverage FTAs effectively compared to their trading partners.
- Utilization Deficit: Only 20–30% of eligible Indian exports utilize FTA concessions, whereas partner nations exploit them at a rate of 60–70%.
- Compliance Hurdles: Complex Rules of Origin (CoO) certifications, paperwork, and heavy administrative compliance costs often outweigh the minor tariff margins available to Indian businesses.
The Way Forward
- Stricter Rules of Origin (CoO): India must conclude the ongoing modernization of the ASEAN-India Trade in Goods Agreement (AITIGA) to establish rigid product-specific rules, preventing Chinese goods from circumventing tariffs via transshipment.
- Tariff Rationalization: Align input customs duties with final product tariffs to correct the inverted duty structure and protect downstream domestic manufacturers.
- Elimination of Non-Tariff Barriers (NTBs): Future negotiations must condition market access on the removal of complex sanitary, phytosanitary, and technical barriers applied by ASEAN nations against Indian agri-products and pharmaceuticals.
- Digitalization of Compliance: Lower the compliance costs for Indian MSMEs by setting up automated, single-window clearance portals for FTA certifications to enhance utilization rates.
Conclusion
FTAs should act as vehicles for export-led growth, not as conduits for de-industrialization. For India to realize its manufacturing potential, upcoming trade reviews must bridge structural tariff asymmetries and strictly defend local value addition against third-party exploitation.
Source: The Indian Express
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