What is a Free Trade Agreement (FTA)?
A Free Trade Agreement (FTA) is a treaty between two or more countries to reduce or eliminate customs duties, simplify trade rules and promote the movement of goods and services.
However, modern FTAs also include provisions on investment, intellectual property rights, digital trade, services, government procurement and dispute settlement.
Therefore, FTAs are increasingly viewed as strategic economic partnerships rather than simple tariff-reduction agreements.
India’s Major FTAs
India has operational FTAs or Comprehensive Economic Partnership Agreements (CEPAs) with:
- ASEAN
- Japan
- South Korea
- Singapore
- UAE (CEPA)
- Australia (ECTA)
- EFTA (Switzerland, Norway, Iceland and Liechtenstein)
Meanwhile, negotiations are underway with:
- European Union
- United Kingdom
- Gulf Cooperation Council (GCC)
- Canada
- Oman
Key Findings
1. Rising Trade Deficits
India’s imports from several FTA partners have grown faster than exports.
For example:
- Trade deficit with ASEAN increased from about $10.4 billion (2012) to over $51 billion (2025).
- Trade deficits have also widened with Japan and South Korea.
Consequently, tariff reduction alone has not ensured balanced trade outcomes.
2. Declining Export Competitiveness
India’s share in the import baskets of several partner countries has declined.
Examples include:
- ASEAN
- Japan
- South Korea
- Singapore
This suggests that Indian products continue to face challenges related to cost, quality and competitiveness.
3. Weak Integration into Global Value Chains (GVCs)
India’s GVC participation has declined from around 37.1% of gross trade to about 34.4% over the past decade.
Meanwhile, countries such as Vietnam, Thailand and Malaysia have strengthened their positions within regional manufacturing supply chains.
As a result, India remains only partially integrated into global production networks.
4. Low Utilisation of FTAs
Only 20–30% of India’s eligible exports reportedly utilise FTA preferences.
High compliance costs, complex Rules of Origin, and certification requirements discourage exporters from claiming tariff benefits.
Relevant Data
India’s External Trade
- Merchandise exports (FY 2025–26): Over US$ 450 billion
- Services exports continue to remain one of India’s strongest sectors.
National Manufacturing Goal
- India aims to increase manufacturing’s share in GDP to 25% under the Make in India initiative.
Logistics Performance
- India improved significantly in logistics through PM Gati Shakti, the National Logistics Policy, and port modernisation.
Key Challenges in India’s FTA Strategy
1. Tariff Asymmetry
Many FTAs require India to reduce high import duties, while partner countries already have relatively low tariffs.
2. Inverted Duty Structure
Higher duties on raw materials than finished products increase manufacturing costs.
3. Weak Manufacturing Base
Limited technological capability reduces India’s ability to compete globally.
4. Compliance Burden
Small exporters often find documentation and Rules of Origin difficult to satisfy.
5. Limited Global Value Chain Integration
India remains less connected to regional production networks than East Asian economies.
6. Logistics and Infrastructure Gaps
Although improving, logistics costs remain higher than those of many competing economies.
Why are FTAs Important for India?
Expand Export Markets
FTAs provide easier access to foreign markets by reducing tariffs.
Attract Foreign Investment
Investors prefer countries with strong market access through trade agreements.
Boost Manufacturing
Greater exports encourage industrial production and employment.
Strengthen Strategic Partnerships
Trade agreements deepen economic and geopolitical cooperation.
Improve Consumer Choice
Consumers benefit from greater product variety and competitive prices.
Government Initiatives
Make in India
Promotes domestic manufacturing and industrial competitiveness.
Production Linked Incentive (PLI) Scheme
Supports strategic manufacturing sectors.
PM Gati Shakti
Improves multimodal logistics infrastructure.
National Logistics Policy (2022)
Reduces logistics costs and enhances supply chain efficiency.
Foreign Trade Policy (FTP) 2023
Focuses on export promotion, ease of doing business and digitalisation.
Way Forward
Strengthen Domestic Manufacturing
India should improve productivity before relying solely on tariff liberalisation.
Increase FTA Utilisation
Simplifying Rules of Origin and certification procedures will encourage exporters.
Deepen GVC Integration
Industrial clusters should be connected with global supply chains.
Rationalise Tariffs
Reducing inverted duty structures will lower manufacturing costs.
Invest in Technology
Innovation, skill development and R&D should become central to trade strategy.
Focus on Quality Standards
Indian exports must consistently meet international technical and environmental standards.
Significance of this Issue
- Determines India’s long-term export growth.
- Supports the goal of becoming a developed economy by 2047.
- Enhances manufacturing competitiveness.
- Strengthens employment generation.
- Improves India’s role in global supply chains.
- Reinforces strategic economic diplomacy.
UPSC Prelims Practice Questions
Q1. With reference to Free Trade Agreements (FTAs), consider the following statements:
- FTAs generally aim to reduce or eliminate tariffs on trade between member countries.
- Modern FTAs may include provisions related to investment, digital trade and intellectual property rights.
- Every FTA automatically establishes a customs union among member countries.
Which of the statements given above is/are correct?
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
Answer: (a)
Explanation
- Statement 1: Correct. FTAs primarily reduce or eliminate tariffs and other trade barriers.
- Statement 2: Correct. New-generation FTAs commonly cover investment, services, e-commerce, intellectual property and digital trade.
- Statement 3: Incorrect. An FTA does not create a customs union. Members retain their own external tariffs for non-member countries. A customs union requires a common external tariff, which is a deeper level of economic integration.
Q2. Which of the following initiatives are intended to improve India’s manufacturing competitiveness and export performance?
- Production Linked Incentive (PLI) Scheme
- PM Gati Shakti National Master Plan
- National Logistics Policy
- Foreign Trade Policy (FTP) 2023
Select the correct answer using the code below:
(a) 1 and 2 only
(b) 2, 3 and 4 only
(c) 1, 3 and 4 only
(d) 1, 2, 3 and 4
Answer: (d)
Explanation
All four initiatives support India’s manufacturing and export ecosystem:
- PLI Scheme boosts domestic production in strategic sectors.
- PM Gati Shakti enhances multimodal infrastructure and connectivity.
- National Logistics Policy reduces logistics costs and improves supply chains.
- Foreign Trade Policy 2023 promotes exports through ease of doing business, digitalisation and market access.
UPSC Mains Practice Question (GS Paper III)
“Free Trade Agreements can accelerate economic growth only when supported by strong domestic manufacturing, efficient logistics and deeper integration into Global Value Chains.” Discuss in the context of India’s recent FTA strategy. (250 words)
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