Explaining India’s growing enthusiasm for FTAs

Author: Rahul Nath Choudhury, ICWA

In 2022, India has renewed its interest in free trade agreements (FTAs) with several economies, including the United Kingdom and Australia. India and Australia had already signed an interim FTA last week and expected to enter into a full FTA by end of this year. India’s approach to resuming negotiations has a sense of urgency and a few rounds of discussion have already taken place. The United Kingdom has traditionally been a large trading partner for India while Australia is emerging as a promising destination.

This is a dramatic shift from India’s earlier approach to FTAs. After assuming power in 2014, the Modi government started reviewing India’s existing trade pacts. There was a widespread belief in the government that FTAs created significant economic losses by allowing subsidised foreign products and other unfair production advantages for foreign firms.

Australian trade matters to India because of its growing energy demands. India aspires to become a leader in energy-consuming industries such as information technology and electric vehicles. An FTA with Australia would allow India to meet its energy needs and export skilled professionals in IT, engineering and other services.

Australia also holds a crucial strategic position for India. An Australian FTA would offer the largest market to Indian businesses in the Pacific region. Initiatives such as the Quadrilateral Security Dialogue (Quad) and the Supply Chain Resilience Initiative have brought the two countries closer than before. An FTA is an opportunity to further strengthen bilateral relations.

In the UK–India FTA, India wants to secure larger market access for its agricultural produce and increase exports in services such as IT, nursing, education and health care. India seeks reduced tariffs in labour-intensive sectors such as textiles, leather and jewellery, which have always found a large market in the United Kingdom. India also wants to secure a larger number of employment visas for its professionals in the United Kingdom.

The difference between the Regional Comprehensive Economic Partnership (RCEP) and the current negotiations lies in their foundations. Since RCEP is a plurilateral agreement, India had to negotiate with many diverse countries and held much less negotiating power compared to bilateral pacts.

India already has a trade arrangement with ASEAN, which makes up most of RCEP’s participants, but its experience has not been very encouraging. China’s membership in RCEP was another concern since India fears Chinese businesses will destroy its domestic industry.

What prompted India’s appetite for new trade agreements? India’s trade deficit reveals a widening gap between export and import figures as it grew from US$118.37 billion in 2014–15 to US$161.34 billion in 2019–20. India aims to become a US$5 trillion economy by 2025 and it cannot achieve this without strong support from the external sector. India aims to boost exports through FTAs to large markets that are performing below their potential, such as Australia.

The outbreak of the COVID-19 pandemic shook the global economy as lockdowns shattered manufacturing plants and global supply chains. Companies started to weigh options to relocate their manufacturing facilities and economies realised the importance of integration. India was no exception.

India’s FTA negotiations are also encouraged by the aim to reduce economic dependence on China. Australia is currently experiencing a trade dispute with China, which has restricted a number of Australian imports and threatened to expand the list. Similarly, the United Kingdom has felt the pinch of Brexit and also needs to diversify its export destinations.

India’s renewed interest in FTAs should also be seen from a strategic perspective. India resumed negotiations with economies with which it has robust trade relations or a trade surplus. India’s strategic and diplomatic relations with these nations have significantly deepened during the last few years, especially as they all perceive China as a threat to global trade and domestic industry.

Geopolitics as well as economics will play a vital role in defining India’s future trade partnerships. India and Australia are both part of the QUAD and conduct joint naval exercises in the Indian Ocean region. Australia is among select countries with which India has a 2+2 dialogue. Similarly, India is a key partner of the UK in defence and security and undertakes joint operation in many regions.

Learning from past FTA experiences, India wants a much more comprehensive agreement with carefully negotiated terms that secure maximum benefits.

The Bharatiya Kisan Union, the largest association of Indian farmers, has already threatened to launch a protest against the proposed FTA with Australia. Such protests were one of the major domestic obstacles that prevented India from entering RCEP. Indian automobile manufacturers and wine sellers also plan to vehemently oppose the FTAs with Australia and the United Kingdom.

Swadeshi Jagran Manch, the economic wing of the Hindu nationalist organisation Rashtriya Swayamsevak Sangh (RSS), has similar intentions. The RSS previously cautioned the government against the negative impact of FTAs and urged it to refrain from any trade deal. An FTA with Australia will face protests from the agricultural sector while the manufacturing sector will lead protests against the UK–India FTA.

The current domestic and global economic situation puts India in a favourable position to sign FTAs. Given that India’s appetite for trade liberalisation is supported by domestic industries and a strong government in power, policymakers are in a hurry to close the deal.

Rahul Nath Choudhury is a Research Fellow at the Indian Council of World Affairs (ICWA), New Delhi. The views expressed in this paper are those of the author.