Preparing the FTA pitch: India, Australia eye full deal amid US tariffs

Three years after India and Australia signed an interim trade deal, the two sides are moving decidedly towards a full-fledged free trade agreement. They have rising US tariffs to contend with

Announcing the interim trade deal between India and Australia on December 29, 2022, Commerce and Industry Minister Piyush Goyal drew a cricketing analogy. The agreement, he said, came with the “speed of Brett Lee and the perfection of Sachin 

Tendulkar” — highlighting the pace and precision with which the pact was completed. 

The deal, officially known as the India-Australia Economic Cooperation and Trade Agreement (ECTA) holds a special place for Goyal. It was India’s first trade agreement with a developed country in over a decade, after New Delhi’s decision to walk out of the China-backed RCEP (Regional Comprehensive Economic Partnership) in 2019. That apart, other than progress on tariff elimination, India was able to remove double taxation on information technology services — a long-standing problem that was eroding the Indian sector’s competitiveness. Nearly three years on, the department of commerce is now focused on ensuring complete saturation or utilisation of the ECTA, espe­ci­ally against the backdrop of the US im­posing a steep 50 per cent tariff on several Indian exports to America from August. 

In August, the department of commerce said utilisation of the ECTA by Indian exporters stood at 84 per cent since its implementation, while Australian export utilization stood at 86 per cent. In FTAs, utilisation rate is a key parameter to assess how the pact is faring — whether the preferential access and lower tariff rates are being used to export and import goods. In trade jargon, the rate of utilisation refers to the percentage of export value using the preferential tariff lines. 

However, it is important to note that India remains a relatively high-tariff economy compared with Australia — a reflection of its current stage of economic development. To be sure, Australia’s average tariff was already lower than India’s before the agreement took effect, which means India’s tariff reduction on certain products is far steeper. 

Win-win 

The rate of utilisation, however, is higher than India’s past free trade agreements (FTA) with its Asian neighbours, where it has been around 50-60 per cent, a senior government official said. So far, it is understood that unlike the trade deals with Japan, South Korea and the 10-nation ASEAN grouping, the one with Australia is considered ‘safe’ and a ‘win-win’ as the two economies do not compete with each other. 

Under the interim agreement, India gets preferential market access to 100 per cent of Australian tariff lines of goods and services — 98.3 per cent from December 29, 2022 and the rest in a phased-manner in five years. In turn, Australia has received preferential access to over 70 per cent of India’s tariff lines. Around 40 per cent of the tariff lines got zero-duty access immediately, including Australian coal, manganese ore, copper concentrates, bauxite, sheep meat, cherries and wool, among others. Most of India’s labour-intensive sectors that received immediate duty concessions — from 5 per cent to zero — are eligible to take advantage of this duty-free access. 

The total merchandise trade between the two countries stood at $24.9 billion in FY22, but remained more or less at the same level in FY25 at $24.1 billion. During the first six months of the current financial year (April-September) India’s exports to Australia contracted 8.7 per cent at $3.71 billion as compared with the same period last year. Imports from Australia contracted by a fifth to $6 billion, driven by a fall in coal shipments. The contraction during the current financial year could be due to frontloading of exports to the US, experts said. 

While it is too early to draw a firm conclusion on the overall success of the trade agreement, export trends over the past few years show that petroleum products continue to dominate Indian shipments to Australia. 

The share of petroleum products in India’s total exports to Australia stood at 54.5 per cent in FY22, compared with 52.3 per cent in FY25. 

Since the implementation of the deal there has been a surge in outbound shipments of readymade garments (by 27.2 per cent), cotton yarns and madeups (24.3 per cent), electronics (128 per cent), drugs and pharmaceuticals (22.1 per cent), marine products (497 per cent), coffee (103.2 per cent), spices (29 per cent), rice (38.4 per cent), ceramics (9.2 per cent) and plastics (22.4 per cent). 

Labour-intensive 

On the other hand, in the case of certain other labour intensive sectors such as gems and jewellery, leather, carpets and engineering goods, growth has been either negative or has remained flat. 

In the case of engineering goods, ex­p­o­rts to Australia stood at $1.24 billion in FY25 as compared with $1.25 billion in FY22. According to Engineering Export Promotion Council of India Chairman Pankaj Chadha, there has been a small drop in export volumes, which is mainly demand driven. “Not to forget that we are competing with China, Vietnam and In­d­onesia in the Australian market, although it’s a temporary dip,” Chadha said. 

Exports of gems and jewellery stood at $338 million in FY22, but fell to $319 million during FY25. An exporter said that the demand and taste of Australian buyers is not typically for gold or gold jewellery. Instead, they are more interested in lab-grown diamonds. 

Gems and Jewellery Export Promotion Council (GJEPC) Chairman Kirit Bhansali cited two reasons for the decline. “Firstly, Australia is a small market and secondly, there is a correction of 15-20 per cent in the price of loose diamonds as compared to last year,” Bhansali said. The government has asked exporters to work hard and make the most of the tr­a­de deal. “In a matter of a few months, we will increase exports to Australia too,” Bh­a­nsali said. Similarly, in the case of leat­h­er, exports declined to $63.3 million in FY25 from $74.7 million in FY22. Outbou­nd shipments of carpets also fell to $62 mi­llion in FY25 from $67.7 million in FY22. 

Ajay Sahai, director-general and chief executive officer, Federation of Indian Export Organisations (FIEO), said that a fair evaluation of any FTA should ideally be undertaken over a five-year horizon, as diversification into new markets is inhe­r­e­ntly a gradual process. “Nevertheless, the India-Australia ECTA has alre­a­dy deli­ve­red encouraging results in se­veral sectors such as apparel, marine products, medical equipment, fruit and vegetables, cera­mic goods, inorganic chemicals, plastics, man-made filaments, tea and coffee. We remain confident that, as supply chains stabilise and business li­n­kages deepen, even stronger and more broad-based export growth will be visible across sectors in the coming years,” he said. 

Pradeep S Mehta, secretary general, CUTS International, a global trade thinktank, said that while fluctuations in total trade volumes are to be expected, the series of broad and deep tariff cuts have enabled diversification of India’s merchandise exports to Australia, as well as easier access to imported raw materials for use in domestic industries in India. “The relatively high FTA utilisation rates emerging from the preferential trade data are evidence of its appeal to firms,” Mehta said. According to Mehta, the ECTA’s implementation has been a shot in the arm for India’s FTA strategy of securing market access and complementary trade interests with developed country trading partners, including the UK and European Free Trade Association. 

Looking ahead 

The two countries are now preparing to finalise a comprehensive trade deal. When ECTA was signed, it was decided that the larger idea would be to use the foundation of the interim deal to resume negotiations on the deeper and more ambitious trade deal — the comprehensive economic cooperation agreement. Since the ECTA was only an interim deal, several aspects of a comprehensive trade agreement, including new-age trade issues did not make it to the agreement. 

In July, Australian trade minister Don Farrell said that India and Australia are likely to expand their trade agreement in the “very near future”. There has been a delay in finalising a deal because the federal election in Australia earlier this year delayed 

the negotiations. 

That apart, the two sides were unable to find common ground on certain iss­u­es. For instance, agricultural products such as milk and other dairy items, chi­ckpeas, apple, rice, bajra, walnut, among others were left out of the interim deal due to the political sensitivities in India. Only a few Australian agricultural products such as oranges, mandarins, almo­nds, pears and cotton among others have been allowed with limited quota. 

While the Australian side is pushing India to further open up its agriculture sector, New Delhi is bargaining for more collaboration in defence, aviation sectors and expediting mutual recognition deals in certain services sectors. With all the benefits yet to kick from the in­t­e­r­im deal, India and Australia are testing the waters and feeling around ea­ch ot­h­er’s sensitivities as they work to give sh­a­pe to what could be a landmark free trade deal.