Bilateral free trade agreements by India have gained extraordinary momentum. The first, with the United Kingdom, was recently concluded. Another two with the world’s foremost markets, the European Union and the United States of America (the third being China), are rapidly advancing with close deadlines to conclude mini deals at the very least, leaving vexatious issues for later resolution. Pending talks have renewed; such as the ones with New Zealand that were stuck since 2015, or those for upgradation like with ones with Chile. These follow the 2022 free trade deals with the United Arab Emirates and Australia. While the present impetus might be fuelled by the tariff disruptions by the US — they have spurred most countries likewise — the shift in economic thinking and trade policy approach is very apparent. Will this ignite the export engine?
The directional change began in 2022 with the resumption and the signing of trade agreements with the UAE and Australia. This year though, the urgency has acquired a ‘now-or-never’ tone and expanded beliefs in open markets. Available information on elements of the India-UK FTA, for instance, indicate a willingness to lower tariffs, albeit reciprocally: in exchange for zero-duty market access for 99% of its exports, India will lower 90% of its tariff lines, freeing 85% within a decade. A fundamental liberalisation is the removal of protection for the automobile industry: tariffs will be lowered from 100% to 10% although it’s unclear by when, with reports about import quotas replacements. Moreover, India will allow foreign bidders access to its public procurement market, currently restricted to domestic businesses with quarter percent share for small ones; the 2022 agreements provided for these stipulations as well.
These are structural changes to open domestic markets, increase competition, and encourage exports, especially labour-intensive, low-wages and skill exports, like textiles, leather, footwear, toys and so on. If, as is widely believed, the above is a template for subsequent trade agreements, especially with the EU and the US, which form nearly half of India’s trade, it is a fundamental departure from the past approach to trade policies, at least since 2015.
Then, the existing comprehensive free trade and economic partnerships were faulted for increased imports, wider trade accounts, manufacturing shrinkage, further distortion of India’s economic structure with insignificant acceleration of exports and employment. A review followed and the ongoing talks stalled. Bilateral investment treaties came in for sharper scrutiny as investor claims from overseas dispute settlements rose, leading to an overhauled model treaty in 2016. Sudden and selective tariffs, safeguard and anti-dumping duties, and non-tariff barriers rose from 2018, lifting India’s average tariff rate ~3-4 percentage points. In 2019, it was decided against joining the Regional Comprehensive Economic Partnership, an FTA among 15 Asian countries.
However, it’s not that the export-led manufacturing goal was abandoned. In fact, in 2019-20, when growth slumped to under-4%, structural reforms like steep cuts in corporate taxation and initiating labour reforms by consolidating jurisprudence across states explicitly focused on exports. The route taken was, however, different: centered on self-sufficiency (the atmanirbhar series), production-linked incentives to square with competitor nations and attract firms/industries exiting China prioritised capital-intensive production (automobiles, electronics, pharmaceuticals) with more trade restrictions, not less. Small-medium enterprises with higher job-creation capacity were on the periphery.
What explains this fundamental turnaround? The reasons can be speculated on. One, past policy outcomes have been less than encouraging: India’s share in world goods’ exports languishes under -2%. Two, firms diversifying supply chains to reduce reliance on China have largely preferred Vietnam, Indonesia, Thailand, amongst other nations, over India; to cite a comparison, Vietnam’s world export share more than doubled between 2020 and 2023 to 6%, illustrating the potential exporting space. Three, the trade deficit ranges between 6%-7% of GDP since 2014, exceeding 7% from 2022-23, suggesting no competitiveness gains. Four, foreign direct investment has been plunging — down to a mere $353 million (net) this year or 0.01% of GDP from 1.6% five years ago. Finally, private investment has not renewed despite years of public capex, spare fiscal capacity for such stimulation is non-existent, consumption has visibly weakened, unemployment risen and is high, while output growth is slowing after the post-pandemic spurt.
Sourcing external demand to fuel investments and growth is, therefore, an imperative. Even though the market-securing attempts transpire in a world with a highly fragmented trade structure with slowing growth, there are opportunities that can be seen. For instance, China, facing the stiffest tariff ire from the US, and the EU are looking to reset their relationship.
The obvious question is this: will labour-intensive exports finally strike deep roots? Will trade fly with these fresh wings?
The answers are highly speculative, at least in the near-term. The optimism on competitive advantage gains from reshoring and trade reorientation strategies needs to be tempered by the US-China truce where convergence is likelier. All countries and blocs are engaging to secure markets bilaterally. This dust will take long to settle while little can be predicted about the final equilibrium or if there will be one or several. Nothing can be expected with these persistent uncertainties.
Over a longer period, it is the relative, not absolute advantage, that will matter for Indian exports. The structural changes are positive -- openness and competition raise productivity, lower costs for both producers and consumers. Such changes alter the returns on different investments, causing resources (for instance, capital, labour) to reallocate across sectors or industries, a long-term process. Irrespective of the merits, there’s a negative fallout of an unannounced, fundamental policy shift: policy clarity and certainty become questionable, leading to hesitations and withdrawal. Consider, for example, the investments inspired and committed in the past based on previous trade policies: future returns on these are more uncertain from domestic policies besides those overseas. Expectations of trade-fueled growth on a lasting basis must therefore be patient, even moderated in the light of all these factors.
Renu Kohli is Senior Fellow, Centre for Social and Economic Progress, New Delhi