Shift towards developed markets: India's FTA needle turns to the West

Indian industry always preferred to have deeper trade relations with traditional markets - EU and the US- as it offers industry greater complementarity

It is exactly 25 years of India’s free trade agreement (FTA) journey, started in the year 2000 when India-Sri Lanka FTA came into effect on 1st March, 2000. Post that, India turned its focus towards East under much published “Look East Policy” and went on to sign FTAs with Singapore, ASEAN, Korea, Japan, and Malaysia. The idea was to diversify India’s export market beyond the West to new emerging economies in the East. Practically during this period, India’s entire focus remained on the Asia-Pacific Region. The much-publicised RCEP, from which India eventually pulled out, too comprised countries from Asia-Pacific region.

 

 

While the Government of India tried to pursue both its strategic and commercial objectives by prioritising this region, Indian industry always preferred to have deeper trade relations with traditional markets - EU and the US. According to them, ASEAN members were the competing countries, while the US and EU offers industry greater complementarity. More importantly, all those products which lost their GSP preferential access in developed markets, their preferences could be restored if India signs FTAs with them.

 

US, EU top export destinations of India

 

This is also evident by the trade data of the last two decades, as despite FTAs (with the ASEAN, Japan and Korea), the US and EU remained the top export destinations of India. The merchandise exports from India to the UK, EU and US together more than doubled between 2010-11 and 2023-24, increasing from US$71.2billion to US$166.3billion. Over the same period India’s total export to the three FTA partners - ASEAN, Japan, and Korea – increased at a much slower pace from US$34.3billion to US$52.7billion.

 

Now exactly after two and a half decades, India’s FTA needle seems to be taking a complete 180 degree turn towards the West. February 2025 is a turning point in this major shift in priority. Prime Minister Narendra Modi’s visit to the US resulted in a decision to launch negotiation on a Bilateral Trade Agreement. This is an important announcement given US President Donald Trump’s aggressive stance on import tariff vis-à-vis US’ major trading partners. It is worthwhile to note that PM Modi landed in Washington, the day President Trump unveiled his administration’s plan for fair and free reciprocal trade, yet he managed to have a concrete deliverable on trade in the joint statement.

 

This was followed by the visit of Secretary of State for the Department for Business and Trade of the UK the Rt Hon Jonathan Reynolds to New Delhi. Last year, when PM Modi and his UK counterpart Rt Hon Keir Starmer met on the sidelines of the G-20 Summit at Rio, the two leaders underlined the importance of early resumption of FTA talks. Taking cue from this, Indian Commerce Minister Piyush Goyal and the visiting Business & Trade Secretary of UK Jonathan Reynolds announced the resumption of FTA negotiations. So far, there have been 14 rounds of negotiation, and the last round was held in March 2024.

 

The third major development is the historic visit of Ursula von der Leyen, President of the European Commission accompanied with 27 members of the European Union College of Commissioners to India on 27–28 February. One of the important agenda items for discussion during her visit was how to expedite and close the India-EU FTA talks. The two leaders tasked their respective negotiating teams to pursue negotiations with an aim to conclude by the year-end. Technically, this is one of the longest FTA talks in which India is involved. Started in 2007, the talks paused in 2013 after 15 rounds of intense negotiations due to significant gap in ambition, but again resumed in 2022. Since the resumption in June 2022, nine rounds of negotiation have happened, but without any meaningful outcomes.

 

Challenge for India

 

Since India’s priority for FTA is moving towards developed markets, the challenge would be more to protect the domestic policy space rather than market access, barring few sectors like automotive and wine & spirits. As both UK and EU have significant FDI in India, their companies would like to use FTA negotiation to press for further easing the regulatory barriers in the Indian market.

 

Amongst the contentious issues, which have been the major impediments to the negotiation with the EU and UK so far, include disagreement over dispute settlement mechanism in investment treaty, access to India’s government procurement market, EU’s demand for a standalone agreement on geographical indication (GI) to seek a more ambitious standard of GI protection for hundreds of its agriculture and dairy products as against what is obligated under national legislation, cross-border data flow, committing beyond WTO TRIPS on IPR, and stronger provisions on labour & environment. For India, these are tough asks to oblige them.

 

After securing political nod at the highest level, the task is cut-out for Indian trade negotiators to deliver FTAs with three of the world’s largest economies. However, the challenges for the government will be to make significant adjustments/changes in its domestic policies through necessary legislation to meet the demands on investment treaty, IPR, data sharing, procurement market access, GI and sustainability. As already mentioned, barring very few sectors such as automobile, wine & spirit, agriculture & dairy, Indian industry may not have very strong opposition to FTA with UK, EU, and US.  (The writer is the chairman of The Hi-Tech Gears)    Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper